SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    --------

                                   FORM 10-Q
(Mark One)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
      EXCHANGE ACT OF 1934

                For the quarterly period ended September 9, 1996

                                     OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from ____________ to _______________
                              
                        Commission file number 0-19649

                       Checkers Drive-In Restaurants, Inc.
             (Exact name of Registrant as specified in its charter)

                 Delaware                                 58-1654960
       (State or other jurisdiction of                 (I.R.S. employer
       incorporation or organization)                  identification no.)

       Barnett Bank Building
       600 Cleveland Street, Eighth Floor
       Clearwater, FL                                      34615
       (Address of principal executive offices)          (Zip code)

Registrant's telephone number, including area code:  (813) 441-3500

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         The Registrant had 51,768,480  shares of Common Stock,  par value $.001
per share, outstanding as of October 24, 1996.

      This document contains 33 pages. Exhibit Index appears at page 32.



<PAGE>


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

<S>        <C>                                                                        <C>  
PART I     FINANCIAL INFORMATION                                                       PAGE

Item 1       Financial Statements (Unaudited)
                Condensed Consolidated Balance Sheets
                    September 9, 1996 and January 1, 1996...............................3
                Condensed Consolidated Statements of Operations
                    Quarter ended September 9, 1996 and September 11, 1995 and
                    Three Quarters ended September 9, 1996 and September 11, 1995.......5
                Condensed Consolidated Statements of Cash Flows
                    Three Quarters ended September 9, 1996 and September 11, 1995.......6
                Notes to Consolidated Financial Statements..............................8

Item 2       Management's Discussion and Analysis of Financial Condition
              and Results of Operations................................................15



PART II      OTHER INFORMATION

Item 1       Legal Proceedings.........................................................28

Item 2       Changes in Securities.....................................................29

Item 3       Defaults Upon Senior Securities...........................................29

Item 4       Submission of Matters to a Vote of Security Holders ......................29

Item 5       Other Information.........................................................29

Item 6       Exhibits and Reports on Form 8-K..........................................30

</TABLE>




























                                        2


<PAGE>

PART I.    FINANCIAL INFORMATION

Item 1.     Financial Statements (Unaudited)

                       CHECKERS DRIVE-IN RESTAURANTS, INC.
                                AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>


ASSETS                                                                   (Unaudited)
                                                                         September 9,    January 1,
                                                                              1996           1996
                                                                       -----------------------------
<S>                                                                    <C>             <C>    
Current Assets:

Cash and cash equivalents:
     Restricted                                                        $   3,200,617   $     687,500
     Unrestricted                                                          2,124,553       2,676,296
Accounts receivable                                                        2,235,111       1,942,544
Notes receivable                                                             235,428       2,885,962
Inventory                                                                  2,362,341       3,161,996
Property and equipment held for resale                                     9,430,110       4,338,964
Costs and earnings in excess of (less than) billings on
    uncompleted contracts                                                     82,632          (6,262)
Income taxes receivable                                                      447,630       3,272,594
Deferred income taxes - current                                            2,952,370            --
Prepaid expenses and other current assets                                  1,321,893       1,374,794
                                                                       -----------------------------
 
       Total current assets                                               24,392,685      20,334,388


Property and equipment, at cost, net of accumulated depreciation
    and amortization                                                     107,224,051     119,949,100
Notes receivable from related parties                                           --         5,182,355
Goodwill and non-compete agreements, net of accumulated amortization
    of  $3,995,949 at September 9 and $3,211,665 at January 1             13,551,431      17,019,078
Deferred income taxes - noncurrent                                              --         3,358,000
Deposits and other noncurrent assets                                       4,632,211         975,996
                                                                       -----------------------------

                                                                       $ 149,800,378   $ 166,818,917
                                                                       ============================= 
 

</TABLE>













See Notes to Condensed Consolidated Financial Statements

                                        3


<PAGE>
                       CHECKERS DRIVE-IN RESTAURANTS, INC.
                                AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY                                         (Unaudited)
                                                                             September 9,      January 1,
                                                                                  1996           1996
                                                                            ------------------------------
<S>                                                                         <C>               <C>   
Current Liabilities:

Short term debt                                                                  --           $  1,000,000
Current installments of long-term debt                                      $  9,298,472        13,170,619
Accounts payable                                                              14,022,670        10,536,745
Accrued wages, salaries and benefits                                           2,684,463         2,637,830
Reserves for restructuring, restaurant relocations and abandoned sites         5,071,001         2,290,223
Accrued liabilities                                                           10,371,410        13,652,230
Deferred income                                                                  572,699           300,000
                                                                            ------------------------------

       Total current liabilities                                              42,020,715        43,587,647


Long-term debt, less current installments                                     44,659,427        38,090,278
Deferred franchise fee income                                                    595,500           763,000
Minority interests in joint ventures                                           2,491,917           549,255
Other noncurrent liabilities                                                   5,830,528         3,852,729
                                                                            ------------------------------

       Total liabilities                                                      95,598,087        86,842,909


Stockholders' Equity:

Preferred  stock,  $.001  par  value.  Authorized  2,000,000  shares,  
    no shares outstanding.
Common  stock,  $.001 par  value,  authorized  100,000,000  shares,
    issued and outstanding 51,528,480 at January 1, 1996 and
    51,768,480 at September 9, 1996                                               51,768            51,528
Additional paid-in capital                                                    90,298,598        90,029,213
Warrants to be issued in settlement of litigation                              3,000,000         3,000,000
Retained earnings                                                            (38,748,075)      (12,704,733)
                                                                            ------------------------------

                                                                              54,602,291        80,376,008
Less treasury stock, at cost, 578,904 shares                                     400,000           400,000
                                                                            ------------------------------

       Net stockholders' equity                                               54,202,291        79,976,008
                                                                            ------------------------------

                                                                            $149,800,378      $166,818,917
                                                                            ==============================

</TABLE>













See Notes to Condensed Consolidated Financial Statements

                                        4


<PAGE>
                       CHECKERS DRIVE-IN RESTAURANTS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                        Quarter Ended                Three Quarters Ended

                                                 September 9,   September 11,      September 9,   September 11,
                                                      1996            1995            1996             1995
                                               ----------------------------------------------------------------
<S>                                            <C>              <C>              <C>              <C>   
REVENUES:

Net restaurant sales                           $  34,875,320    $  41,210,771    $ 107,193,134    $ 129,841,574
Royalties                                          1,869,299        1,938,899        5,394,605        5,187,205
Franchise fees                                        96,806          220,000          679,662          581,250
Modular restaurant packages                          246,575           81,818          893,307        2,808,789
                                               ----------------------------------------------------------------

Total revenues                                    37,088,000       43,451,488      114,160,708      138,418,818
                                               ----------------------------------------------------------------
COSTS AND EXPENSES:

Restaurant food and paper cost                    12,417,171       14,503,036       37,080,333       46,490,656
Restaurant labor costs                            13,139,079       14,854,113       38,341,282       42,523,123
Restaurant occupancy expense                       3,170,873        2,859,833        8,827,327        8,638,776
Restaurant depreciation and amortization           2,064,464        2,254,296        6,022,873        7,717,781
Advertising expense                                1,490,032        1,932,466        3,596,959        6,165,166
Other restaurant operating expense                 3,716,185        3,655,663        9,954,279       10,930,410
Costs of modular restaurant package revenues         381,541          616,580        1,379,920        3,897,224
Other depreciation and amortization                1,053,361        1,015,994        2,719,771        2,750,311
Selling, general and administrative expenses       5,442,298        8,094,221       12,738,827       17,948,967
Impairment of long-lived assets                    8,468,036             --          8,468,036             --
Losses on assets to be disposed of                 5,701,741        3,192,000        5,701,741        3,192,000
Refinancing costs                                    845,775          344,000          845,775          344,000
Provision for inventory obsolescence                 500,000          645,000          500,000          645,000 
                                               ----------------------------------------------------------------              

    Total costs and expenses                      58,390,556       53,967,202      136,177,123      151,243,414
                                               ----------------------------------------------------------------   

    Operating Loss                               (21,302,556)     (10,515,714)     (22,016,415)     (12,824,596)
                                               ----------------------------------------------------------------   
OTHER INCOME (EXPENSE):

Interest Income                                      125,852          126,805          621,725          360,858
Interest Expense                                  (1,407,270)      (1,403,748)      (4,012,518)      (4,050,628)
                                               ----------------------------------------------------------------   

  Loss before minority interests and income
     tax expense (benefit)                       (22,583,974)     (11,792,657)     (25,407,208)     (16,514,366)
Minority interests                                   (55,907)        (293,034)          10,475         (221,073)
                                               ----------------------------------------------------------------   

  Loss before income tax expense (benefit)       (22,528,067)     (11,499,623)     (25,417,683)     (16,293,293)
Income tax expense (benefit)                       1,714,659       (4,188,000)         625,659       (6,058,000)
                                                                                                  
                                               ----------------------------------------------------------------
  Net loss                                     $ (24,242,726)   $  (7,311,623)   $ (26,043,342)   $ (10,235,293)
                                               ================================================================
                                                                                                
Net loss per common share                      $       (0.47)   $       (0.14)   $       (0.50)   $       (0.20)
                                               ================================================================
Weighted average number of common shares
outstanding                                       51,768,480       51,275,146       51,722,448       50,622,826
                                               ================================================================
</TABLE>







                                         5


<PAGE>
                      CHECKERS DRIVE-IN RESTAURANTS, INC.
                                AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                     Three Quarters Ended

                                                                 September 9,   September 11,
                                                                     1996            1995
                                                                ----------------------------
<S>                                                             <C>             <C>    
Cash flows from operating activities:

Net loss                                                        $(26,043,342)   $(10,235,293)
Adjustments to reconcile net earnings to net cash provided by
  operating activities:
      Depreciation and amortization                                8,742,644      10,468,092
      Loss on sale of property and equipment                         165,248          72,231
      Losses on assets to be disposed of                           5,701,741       3,192,000
      Impairment of long-lived assets                              8,468,036            --
      Provisions for bad debt, inventory obsolescence and
         sales taxes                                               1,749,644       1,913,000
      Refinancing costs                                              845,775         344,000
      Minority interests in earnings                                  10,475        (221,073)
Change in assets and liabilities:
     Decrease (Increase) in receivables                            2,959,428        (319,900)
     Decrease in inventory                                           299,655         552,814
     Increase in costs and earnings in excess of
        billings on uncompleted contracts                            (88,894)     (1,556,892)
     Decrease (Increase) in income taxes receivable                2,824,964        (745,141)
     Increase in prepaid expenses and other                         (955,720)       (450,246)
     Increase (Decrease) in deferred income taxes                    405,630      (4,297,000)
     Increase in deposits and other                                   (8,605)       (309,073)
     Increase (Decrease) in accounts payable                       3,167,683      (1,662,352)
     (Decrease) Increase in accrued liabilities                   (1,000,209)      5,342,413
     Increase in deferred income                                     105,199         357,000
                                                                ----------------------------                  
       Net cash provided (used) by operating activities            7,349,352       2,444,580

Cash flows from investing activities:
Capital expenditures                                              (2,963,263)     (1,601,057)
Proceeds from sale of assets                                       1,468,974       5,279,592
Acquisition of stores, net cash paid                                (200,000)        (88,823)
                                                                ----------------------------                
       Net cash provided (used) in investing activities           (1,694,289)      3,589,712
                                                                ----------------------------                 

Cash flows from financing activities:
Proceeds from borrowings of short-term debt                             --         1,000,000
Proceeds from borrowings of long-term debt                              --         4,183,195
Principal payments on long-term debt                              (3,825,873)     (8,957,979)
Proceeds from investment by minority interests                       285,000            --
Distributions to minority interests                                 (152,816)       (131,571)
                                                                ----------------------------
       Net cash used by financing activities                      (3,693,689)     (3,906,355)
                                                                ----------------------------               
</TABLE>


                                        6


<PAGE>

<TABLE>
<CAPTION>
                                                                     Three Quarters Ended

                                                                 September 9,   September 11,
                                                                     1996            1995
                                                                ----------------------------
<S>                                                             <C>             <C>    
                                                                            
       Net increase (decrease) in cash                             1,961,374       2,127,937
Cash at beginning of period                                        3,363,796       3,511,525
                                                                ----------------------------
                                                      
Cash at end of period                                           $  5,325,170    $  5,639,462
                                                                ============================


Supplemental disclosures of cash flows information --
    Interest paid                                               $  3,957,317    $  3,072,005
    Income taxes paid                                           $       --      $    182,121
    Capital lease obligations incurred                          $    225,000    $  5,000,000


Schedule of noncash investing and financing activities --
    Acquisitions:                                               $  8,195,438    $  3,071,861
       Fair value of assets acquired                              (4,973,758)           --
       Receivables forgiven                                        1,421,517            --
       Reversal of deferred gain                                  (4,443,197)     (2,245,105)
       Liabilities assumed                                              --          (737,933)
       Stock issued
                                                                ----------------------------                                  

Total cash paid for net assets acquired                         $    200,000    $     88,823
                                                                ============================
</TABLE>
































                                        7


<PAGE>
                       CHECKERS DRIVE-IN RESTAURANTS, INC.
                                AND SUBSIDIARIES
                         NOTES TO CONDENSED CONSOLIDATED
                              FINANCIAL STATEMENTS
                                   (UNAUDITED)

Note 1      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BASIS OF PRESENTATION - The accompanying unaudited financial statements have
been prepared in accordance with generally  accepted  accounting  principles for
interim  financial  information and the instructions to Form 10-Q and Article 10
of Regulation  S-X.  Accordingly,  they do not include all the  information  and
notes  required  by  generally  accepted  accounting   principles  for  complete
financial statements. In the opinion of management, all adjustments necessary to
present  fairly  the  information  set forth  therein  have been  included.  The
operating  results  for the three  quarters  ended  September  9, 1996,  are not
necessarily  an  indication  of the results  that may be expected for the fiscal
year ending  December 30, 1996.  Except as disclosed  herein,  there has been no
material  change in the information  disclosed in the notes to the  consolidated
financial  statements  included in the Company's  Annual Report on form 10-K for
the year ended January 1, 1996. Therefore, it is suggested that the accompanying
financial  statements be read in conjunction with the Company's  January 1, 1996
consolidated  financial  statements.  As of January 1, 1994, the Company changed
from a calendar  reporting year ending on December 31st to a year which will end
on the Monday  closest to December  31. Each  quarter  consists of three  4-week
periods with the exception of the fourth  quarter which  consists of four 4-week
periods.

(b)  PURPOSE OF  ORGANIZATION  - The  principal  business  of the Company is the
operation  and  franchising  of Checkers  restaurants  (the  "Restaurants").  At
September 9, 1996,  there were 505 Restaurants  operating in 23 different states
and the District of Columbia.  Of those Restaurants,  255 were  Company-operated
(including 14 stores  operated by joint  ventures  owned at various  percentages
ranging from 10.55% to 75%) and 250 were operated by  franchisees.  The accounts
of the joint  ventures  have been  included  with those of the  Company in these
consolidated financial statements.

            On February  15, 1994,  one of the  Company's  former  subsidiaries,
Champion Modular  Restaurant  Company,  was merged into and with the Company and
currently exists as a division of the Company.
            Intercompany  balances  and  transactions  have been  eliminated  in
consolidation and minority interests have been established for the outside joint
venture partners' interests.

(c) REVENUE  RECOGNITION - Franchise  fees are generated from the sale of rights
to develop,  own and operate  Restaurants.  Such fees are based on the number of
potential  Restaurants in a specific area which the franchisee agrees to develop
pursuant  to the terms of the  franchise  agreement  between the Company and the
franchisee and are  recognized as income on a pro rata basis when  substantially
all of the Company's  obligations  per location are satisfied,  generally at the
opening of the Restaurant. Franchise fees are nonrefundable.

            The  Company  receives  royalty  fees  from  franchisees  based on a
percentage of each restaurant's  gross revenues.  Royalty fees are recognized as
earned.
            Champion recognizes revenues on the percentage-of-completion method,
measured by the percentage of costs incurred to the estimated total costs of the
contract.

(d) CASH,  AND CASH  EQUIVALENTS  - The  Company  considers  all  highly  liquid
instruments  purchased with an original maturity of less than three months to be
cash  equivalents.  Included  in cash and cash  equivalents  are  $1,355,000  in
restricted  funds held for  workers  compensation  self-insurance  purposes  and
$1,845,617  held in escrow by the Company's  new Investor  Group (see Note 2) at
September  9, 1996 and  $687,500  held for workers  compensation  self-insurance
purposes at January 1, 1996.

(e) RECEIVABLES - Receivables consist primarily of franchise fees, royalties and
notes due from franchisees,  and receivables from the sale of modular restaurant
packages.  The allowance for doubtful receivables was $1,876,193 at September 9,
1996 and $1,357,938 at January 1, 1996.
                                        8

<PAGE>

(f) INVENTORY - Inventories are stated at the lower of cost (first-in, first-out
(FIFO) method) or market.

(g)  PRE-OPENING COSTS - Labor costs and costs of hiring and training  personnel
relating  to opening new  restaurants  are  capitalized  and  amortized  over 13
periods.  Such  costs  totalled  $161,234  at  January  1, 1996 and  $50,542  at
September 9, 1996.

(h)  PROPERTY AND EQUIPMENT - Property and  equipment (P & E) are stated at cost
except  for P & E that have been  impaired,  for  which the  carrying  amount is
reduced to estimated fair value. Property and equipment under capital leases are
stated at their  fair value at the  inception  of the  lease.  Depreciation  and
amortization  are computed on  straight-line  method over the  estimated  useful
lives of the assets.

(i)  IMPAIRMENT  OF LONG LIVED ASSETS - During the fourth  quarter of 1995,  the
Company early adopted the Statement of Financial  Accounting  Standards No. 121,
"Accounting for the Impairment of Long-Lived  Assets and Long-Lived Assets to be
Disposed Of" (SFAS 121) which requires the write-down of certain intangibles and
tangible property  associated with under performing sites to the level supported
by the forecasted discounted cash flow (see Note 5).

(j)  GOODWILL AND NON-COMPETE AGREEMENTS - Goodwill and  non-compete  agreements
are  being  amortized  over  20  years  and  3 to 7  years,  respectively,  on a
straight-line basis.

(k)  INCOME TAXES - The Company accounts for income taxes under the Statement of
Financial  Accounting  Standards  No. 109,  "Accounting  for Income Taxes" (SFAS
109). Under the asset or liability  method of SFAS 109,  deferred tax assets and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  Under SFAS 109,  the effect on  deferred  tax assets and
liabilities  of a change in tax rates is recognized in income in the period that
includes the enactment date (see Note 6).

(l) USE OF ESTIMATES - The preparation of the financial statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reported period. Actual results could differ from those estimates.

(m)  RECLASSIFICATIONS  - Certain amounts in the 1995 financial  statements have
been reclassified to conform to the 1996 presentation.

Note 2      LONG-TERM DEBT

Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                                   September 9,     January 1,
                                                                                       1996             1996
                                                                                 --------------------------------
<S>                                                                                <C>             <C>         
Notes payable and restructuring fee under Loan Agreement                           $ 39,818,099    $ 37,021,241
Notes payable due at various dates, secured by buildings and equipment, with
   interest at rates primarily ranging from 9.0% to 15.83%, payable monthly           9,937,693      10,658,804
Unsecured notes payable, bearing interest at rates ranging from prime to 12%          3,480,852       3,580,852
Notes  payable  to the  Internal  Revenue  Service  and the  State  of  Illinois
   Department of Revenue, with interest at 9.125%, payable quarterly
   through June 2001.                                                                   700,000              --
Other                                                                                    21,255              --
                                                                                 --------------------------------
Total long-term debt                                                                 53,957,899      51,260,897
Less current installments                                                             9,298,472      13,170,619
                                                                                 --------------------------------
Long-term debt, less current installments                                          $ 44,659,427    $ 38,090,278
                                                                                 ================================

</TABLE>
                                   9

<PAGE>
            On October 28, 1993, the Company  entered into a loan agreement with
a group of banks ("Loan Agreement") providing for an unsecured, revolving credit
facility.  The Company borrowed  approximately  $50,000,000  under this facility
primarily  to open  new  Restaurants  and pay off  approximately  $4,000,000  of
previously existing debt.

            The Company  subsequently  arranged  for this Loan  Agreement  to be
converted to a term loan and  collateralized  the loan with substantially all of
the  Company's  assets.  The term loan  requires  monthly  principal  reductions
continuing through July 1998.  Beginning in the fifth period of 1996,  principal
payments  are the greater of fixed  monthly  amounts or a formula  based on Cash
Flow as  defined  under the Loan  Agreement.  The  remaining  aggregate  minimum
principal repayments are $5,600,000 in 1996,  $7,800,000 in 1997, $4,200,000 for
the period January  through July 1998 and a balloon  payment of $18,218,099  due
July 31, 1998. Interest is payable monthly at the prime rate plus 2.5% Dividends
are prohibited and the Company is required to maintain certain  financial ratios
under the Loan Agreement.

            In early  July  1996,  DDJ  Capital  Management  LLC  ("DDJ")  began
negotiating  with  the bank  group  for an  assignment  to it of all of the bank
group's rights under the Loan Agreement.  Anticipating  the transfer of the Loan
Agreement  and the debt  thereunder,  and due to  impairment of its current cash
flow, the Company did not make the $500,000 principal payment due under the Loan
Agreement  on July 15, 1996.  On July 29,  1996,  the Company and the bank group
entered into an amendment to the Loan Agreement  providing for the assignment of
all of the  rights of the bank group  under the Loan  Agreement  to The  Galileo
Fund, L.P. of Boston,  Massachusetts  ("Galileo Fund"), an affiliate of DDJ. The
amendment  also  provided for a temporary  waiver of all  defaults  (the July 15
payment  default and failure to meet certain  financial  covenants at the end of
the second  fiscal  quarter) by the Company under the Loan  Agreement.  Upon the
assignment of the Loan Agreement, Galileo Fund immediately assigned a portion of
its interests in the Loan  Agreement and the amounts due  thereunder to Foothill
Capital Corporation of Los Angeles, California, Pearl Street L.P. (a division of
Goldman, Sachs & Company) of New York, New York and Canpartners  Investments IV,
LLC of Los Angeles,  California (collectively,  with Galileo Fund, the "Investor
Group").
            On September 17, 1996, the Company reached an agreement in principle
on debt  restructuring with the Investor Group.  Pursuant to such agreement,  if
consummated,  the term of the credit facility will be extended by one year until
July 31, 1999. The agreement  provides that no principal  payments are scheduled
through the first reporting period of 1997. In reporting  periods 2 through 8 of
1997, the Company will be scheduled to make minimum principal reduction payments
of $200,000 per period.  Those  payments  will increase to $275,000 in reporting
periods 9 through 13 in 1997,  and to $350,000  until July 31, 1999. The Company
has  agreed to a fixed  interest  rate of 13.75% per  annum.  Additionally,  the
agreement  provides for a restructuring fee of $4.0 million payable at maturity,
which can be converted into common stock at the option of the Company and/or the
Investor Group under certain specified circumstances. The September 17 agreement
in principle contains  financial  covenants that the Company is currently unable
to meet.  Management has attempted to renegotiate these financial  covenants and
obtain  definitive   documentation   from  the  Investor  Group,  but  has  been
unsuccessful  to date in this effort.  The Investor Group has recently  informed
the Company that they are considering  selling the Company's debt to other third
parties, which include companies with affiliates in the restaurant business, and
management  believes that this  potential  sale has caused the Investor Group to
delay  finalizing a restructuring of the debt. The Investor Group has granted an
extension of their waiver of the  Company's  defaults  under the Loan  Agreement
through  November  8, 1996.  Although  management  intends to continue to seek a
restructuring  of  the  Company's  debt  with  the  Investor  Group  and/or  any
subsequent purchaser of the debt, as well as financing from other third parties,
there can be no assurance that a restructuring  basically on the terms set forth
in the agreement in principle (with  appropriate  modifications to the financial
covenants), or on other terms acceptable to the Company, will be consummated, or
that the Company will be able to obtain any other financing source.  The Company
does not  currently  have the ability to cure the payment  defaults or financial
covenant  defaults  that have  occurred and been waived to date.  The Company is
currently in active  discussions with several third parties concerning a variety
of potential strategic transactions. There can be no assurance that any of these
discussions  will result in the  consummation  of any particular  transaction or
what form the transaction might take; however, the Company's current focus is on
a transaction  that would provide the Company with  additional  liquidity and an
opportunity for future growth, without a change in control of the Company.

                                   10


<PAGE>
            On August 2, 1995, the Company entered into a purchase agreement (as
amended  in  October  1995 and April  1996,  the  "Rall-Folks  Agreement")  with
Rall-Folks,  Inc.  ("Rall-Folks")  pursuant to which the Company agreed to issue
shares of its Common Stock in exchange for and in complete satisfaction of three
promissory notes of the Company held by Rall- Folks (the "Rall-Folks Notes"). On
the closing date,  the Company will deliver to  Rall-Folks  shares of its Common
Stock  with a  value  equal  to the  then  outstanding  balance  due  under  the
Rall-Folks  Notes  (the  "Rall-Folks  Purchase  Price").  The  total  amount  of
principal outstanding under the Rall-Folks Notes was approximately $1,888,000 as
of January 1, 1996 and $1,788,000 as of September 9, 1996. The Rall-Folks  Notes
are fully subordinated to the Company's existing debt with the Investor Group.

            Under the terms of the Rall-Folks Agreement,  the Company guaranteed
that if Rall-Folks sells all of the Common Stock issued for the Rall-Folks Notes
in a reasonably prompt manner (subject to certain  limitations  described below)
Rall-Folks  will receive net  proceeds  from the sale of such stock equal to the
Rall-Folks  Purchase  Price. If Rall-Folks  receives less than such amount,  the
Company  will  issue to  Rall-Folks,  at the  option of  Rall-Folks,  either (i)
additional  shares of Common Stock, to be sold by Rall-Folks,  until  Rall-Folks
receives an amount equal to the Rall-Folks  Purchase  Price, or (ii) a six-month
promissory note bearing interest at 11%, with all principal and accrued interest
due at maturity,  and  subordinated  to the Company's  bank debt pursuant to the
same  subordination  provisions,  equal to the difference between the Rall-Folks
Purchase  Price and the net amount  received by Rall-Folks  from the sale of the
Common Stock.

            On August 3, 1995, the Company entered into a purchase agreement (as
amended in October 1995 and April 1996,  the "RDG  Agreement")  with  Restaurant
Development  Group,  Inc.  ("RDG") pursuant to which the Company agreed to issue
shares of its Common  Stock in exchange  for and in complete  satisfaction  of a
promissory note of the Company held by RDG (the "RDG Note"). The total amount of
principal  outstanding  under the RDG Note was  approximately  $1,693,000  as of
January 1, 1996 and as of September 9, 1996. The RDG Note is fully  subordinated
to the Company's existing debt with the Investor Group. In partial consideration
of the transfer of the RDG Note to the Company,  the Company will deliver to RDG
shares  of Common  Stock  with a value  equal to the sum of (i) the  outstanding
balance due under the RDG Note on the closing date and (ii)  $10,000  (being the
estimated  legal  expenses  of  RDG  to  be  incurred  in  connection  with  the
registration of the Common Stock) (the "RDG Purchase Price").

            As further  consideration  for the  transfer  of the RDG Note to the
Company,  the  Company  agreed to issue RDG a warrant  (the  "Warrant")  for the
purchase  of  120,000  shares of Common  Stock at a price  equal to the  average
closing  sale price of the Common  Stock for the ten full trading days ending on
the third  business day  immediately  preceding  the closing date (such price is
referred  to a the  "Average  Closing  Price");  however,  in the event that the
average  closing  price of the  Common  Stock  for the 90 day  period  after the
closing date is less than the Average Closing Price,  the purchase price for the
Common Stock under the Warrant will be changed on the 91st day after the closing
date to the average  closing  price for such 90 day period.  The Warrant will be
exercisable at any time within five years after the closing date.

            Under the terms of the RDG  Agreement,  the Company  has  guaranteed
that if RDG  sells  all of  such  Common  Stock  issued  for  the RDG  note in a
reasonably prompt manner (subject to certain  limitations  described below), RDG
will receive net  proceeds  from the sale of such stock equal to at least 80% of
the RDG Purchase Price. If RDG receives less than such amount,  the Company will
issue  additional  shares of Common  Stock to RDG, to be sold by RDG,  until RDG
receives an amount equal to 80% of the Purchase Price.

            The  Rall-Folks  Notes and the RDG Notes were due on August 4, 1995.
Pursuant to the Rall-Folks Agreement and the RDG Agreement, the Rall-Folks Notes
and the RDG Note were to be acquired by the Company in exchange for Common Stock
on or before  September 30, 1995. The Company and Rall-folks and RDG amended the
Rall-  Folks  Agreement  and the RDG  Agreement,  respectively,  to allow  for a
closing in May 1996 (subject to extension in the event closing is delayed due to
review by the Securities and Exchange  Commission of the registration  statement
covering the Common  Stock to be issued in the  transaction).  The  transactions
with  Rall-Folks  and RDG have  been  delayed  due to the  Company's  continuing
negotiations  with  the  Investor  Group  concerning  the  restructuring  of the
Company's debt.  Each of the parties  currently has the right to terminate their
respective Agreement (as extended).

            Pursuant to the Rall-Folks Agreement and the RDG Agreement, the term
of the Notes will be extended until the earlier of the closing of the repurchase
of the Notes or until  approximately  one month  after  the  termination  of the
applicable  Agreement  by a party in  accordance  with  its  terms.  Closing  is
contingent upon a number of conditions,  including the prior  registration under
the federal and state  securities  laws of the Common Stock to be issued and the
subsequent approval of the transaction by the stockholders of Rall-Folks and RDG

                                       11

<PAGE>

of their respective transactions.  In the event the Company complies with all of
its  obligations  under  the  Rall-Folks   Agreement  and  the  stockholders  of
Rall-Folks do not approve the transaction, the term of the Rall-Folks Notes will
be extended until  December 1996. In the event the Company  complies with all of
its  obligations  under the RDG  Agreement  and the  stockholders  of RDG do not
approve the transaction, the term of the RDG Note will be extended approximately
one year.

            Under the terms of the  Rall-Folks  Agreement and the RDG Agreement,
if the transaction  contemplated  therein is consummated,  so long as Rall-Folks
and RDG, respectively,  is attempting to sell the Common Stock issued to it in a
reasonably  prompt manner  (subject to the  limitations  described  below),  the
Company is obligated  to pay to it in cash an amount each quarter  equal to 2.5%
of the value of the Common Stock held by it on such date (such value being based
upon the value of the Common Stock when issued to it).

            On  April  12,  1996,  the  Company  entered  into a Note  Repayment
Agreement (the "NTDT Agreement") with Nashville Twin Drive-Thru  Partners,  L.P.
("NTDT")  pursuant to which the Company may issue  shares of its Common Stock in
exchange for and in complete  satisfaction  of a promissory  note of the Company
held by NTDT which matured on April 30, 1996 (the "NTDT Note"). The Company will
issue  shares of Common Stock to NTDT in blocks of two hundred  thousand  shares
each,  which will be valued at the closing  price of the Common Stock on the day
prior to the date they are delivered to NTDT (such date is hereinafter  referred
to as the  "Delivery  Date"  and the value of the  Common  Stock on such date is
hereinafter  referred to as the "Fair Value").  The amount outstanding under the
NTDT Note will be reduced by the Fair  Value of the stock  delivered  to NTDT on
each  Delivery  Date.  The Company is obligated to register each block of Common
Stock for resale by NTDT under the federal  and state  securities  laws,  and to
keep such  registration  effective for a sufficient  length of time to allow the
sale of the block of Common Stock,  subject to  limitations  on sales imposed by
the Company  described below. As each block of Common Stock is sold, the Company
will issue another block,  to be registered  for resale and sold by NTDT,  until
NTDT  receives  net  proceeds  from the sale of such  Common  Stock equal to the
balance due under the NTDT Note.  The Company  will  continue to pay interest in
cash on the  outstanding  principal  balance due under the NTDT Note through the
date on  which  NTDT  receives  net  proceeds  from  the  sale of  Common  Stock
sufficient  to repay the  principal  balance of the NTDT Note.  On each Delivery
Date  and on the  same  day of  each  month  thereafter  if NTDT  holds  on such
subsequent date any unsold shares of Common Stock,  the Company will also pay to
NTDT in cash an amount  equal to .833% of the Fair Value of the shares of Common
Stock  issued  to NTDT as part of such  Block of Stock  and held by NTDT on such
date.  Once the NTDT Note has been repaid in full,  NTDT is  obligated to return
any  excess  proceeds  or shares of Common  Stock to the  Company.  The  Company
delivered  the first  block of 200,000  shares  with a fair value of $228,125 to
NTDT on April 18, 1996. The total amount of principal outstanding under the NTDT
Note was  approximately  $1,354,000  as of January 1, 1996 and  $1,126,162 as of
September 9, 1996. The NTDT Note is fully subordinated to the Company's existing
debt with the Investor Group.  Pursuant to the terms of the NTDT Agreement,  the
term of the NTDT  Note  will be  extended  until  May 31,  1997,  so long as the
Company is complying with its obligations  under the NTDT Agreement and NTDT has
received at least  $1,000,000  from the sale of the Common  Stock by January 31,
1997. Due to the delay in registering  the Common Stock issued to NTDT caused by
the  renegotiation of the Company's debt with the Investor Group, it is doubtful
that  $1,000,000  could be received by NTDT from the sale of Common  Stock under
the terms of the NTDT  Agreement by January 31, 1997.  There can be no assurance
as to what  action,  if any,  NTDT will take as a result.  In the event that the
Company  files  a  voluntary  bankruptcy  petition,  an  involuntary  bankruptcy
petition  is filed  against  the Company  and not  dismissed  within 60 days,  a
receiver or trustee is appointed for the Company's assets,  the Company makes an
assignment of substantially  all of its assets for the benefit of its creditors,
trading in the Common Stock is suspended  for more than 14 days,  or the Company
fails to comply with its obligations  under the NTDT Agreement,  the outstanding
balance due under the NTDT Note will become due and NTDT may thereafter  seek to
enforce the NTDT Note.

            In order to promote an orderly  distribution  of any Common Stock to
be issued to and sold by  Rall-Folks,  RDG and NTDT, the Company has imposed the
following limits on the sales that may be made by Rall-Folks,  RDG and NTDT: (i)
each may sell not more than 50,000  shares of Common Stock per week  (150,000 in
the aggregate) and (ii) each may sell not more than 25,000 shares in any one day
(75,000 shares in the aggregate),  provided that each may sell additional shares
in excess of such limits if such  additional  shares are sold at a price  higher
than the lowest then current bid price for the Common Stock.

            The consummation of the transaction with each of RDG, Rall-Folks and
NTDT has been delayed by the  assignment  of the Loan  Agreement to the Investor
Group and the renegotiation of the Loan Agreement.  Pursuant to the terms of the
current  Loan  Agreement,  the  Company is  obligated  to  purchase or repay the

                                       12

<PAGE>
Rall-Folks Notes, the RDG Note and the NTDT Note using Common Stock, and may not
repay them or make  arrangements to repay them in cash. The Company is unable to
predict at this time what arrangements may be negotiated with the Investor Group
with respect to the Company's  obligations  under the  agreements and notes with
RDG,  Rall-Folks  and NTDT. In the event that the Company is unable to negotiate
an amendment to the Loan  Agreement  that is mutually  acceptable to the Company
and the Investor Group, the Company will likely default under the Loan Agreement
and be unable to consummate the currently  contemplated  transactions  with RDG,
Rall-Folks and NTDT and will, therefore,  likely default under the RDG Note, the
Rall-Folks Notes and the NTDT Note.

Note 3:     STOCK OPTION PLAN AND WARRANTS

            In August  1991,  the Company  adopted a stock  option plan  whereby
incentive stock options,  nonqualified stock options,  stock appreciation rights
and  restricted  shares can be granted to  eligible  salaried  individuals.  All
options  expire no later than 10 years from the date of grant.  The  Company has
reserved 3,500,000 shares for issuance under the plan. At September 9, 1996, the
Company had  outstanding  nonqualified  options at per share prices ranging from
$.75 to $19.00 to purchase  3,337,371  common shares which vest in years through
1999.

            In August 1994, employees granted $11.50,  $11.63, $12.33 and $19.00
options were given the  opportunity  to forfeit  those options and be granted an
option to purchase a share at $5.13 for every two option  shares  retired.  As a
result of this offer,  options for 662,228  shares were  forfeited in return for
options for 331,114 shares at $5.13 per share.

            During the first quarter of 1996, the Board of Directors  approved a
plan to offer existing employees of the Company (excluding  executive  officers)
the option of cancelling existing stock options granted to them in 1993 and 1994
with exercise prices in excess of $2.75 in exchange for a new option grant for a
lesser  number of  shares at an  exercise  price of  $1.95,  representing  a 25%
premium over the market price of the Company's common stock on the date the plan
was approved.  The plan provides that existing options with an exercise price in
excess of $11.49  could be  cancelled  in exchange for new options on a four for
one basis.  Options  with an exercise  price  between  $11.49 and $2.75 could be
cancelled  in exchange  for new options on a three for one basis on the date the
plan was approved.  Eligible employees held options for 36,566 shares granted in
1993 and 1994  shares  with  exercise  prices in excess of $11.49,  and  365,400
shares  with  exercise  prices  between  $11.49  and  $2.75.  The plan  required
employees to accept the offer by April 30, 1996. As of the acceptance  deadline,
eligible  employees had  surrendered  options for 27,320 shares with an exercise
price in excess of $11.49 and 27,071 shares with exercise  prices between $11.49
and $2.75,  and new  options for 15,877  shares with an exercise  price of $1.95
have been issued therefore.

            On July 12, 1996,  the Company  issued  incentive  stock  options to
purchase  934,679 shares at $1.53 per share which vest ratably,  25% on July 12,
1996 and an additional 25% on each July 12th through 1999, to certain  employees
of the  Company.  Options to  purchase  87,479  shares from this  issuance  were
cancelled  during the quarter ended September 9, 1996.  During the quarter ended
September 9, 1996, the Company issued incentive stock options to purchase 12,000
shares at $.75 per share,  which vest ratably in years  through 1999, to certain
new employees of the Company.

            On March 31, 1995, the Company  agreed to issue 150,000  warrants to
the bank group under the loan agreement  described in Note 3. The exercise price
of the warrants was $2.69 per share. The warrants vested in one-third increments
on April 30, 1996,  October 30, 1996 and April 30,  1997.  These  warrants  were
transferred to the Investor Group. It is anticipated that in connection with the
restructuring  of the Company's  debt with the Investor  Group that the warrants
will be  amended to provide  for an  exercise  price of $.001 per share and will
become fully vested immediately.

            As partial  consideration  for the transfer of a promissory  note of
the Company (the  "Note") back to the Company,  the Company will be obligated to
deliver to the holder of the Note a warrant (the  "Warrant") for the purchase of
120,000  shares of Common  Stock at a price  equal to the average  closing  sale
price of the  Common  Stock for the ten full  trading  days  ending on the third
business day  immediately  preceding the closing date (such price is referred to
as the "Average Closing Price");  however, in the event that the average closing
price of the Common  Stock for the ninety day period  after the closing  date is
less than the Average  Closing  Price,  the purchase  price for the Common Stock
under the Warrant  will be changed on the 91st day after the closing date to the
average  closing  price  for  such  ninety  day  period.  The  Warrant  will  be
exercisable at any time within five years after the closing date. The Company is
obligated to register the stock acquired by the holders of the Warrant. See Note
2.

                                         13

<PAGE>
            The Company expects to issue warrants to purchase  5,100,000  shares
of Common Stock at an exercise  price of $1.375 per share in  settlement of that
certain litigation entitled Lopez et al. v. Checkers Drive-In Restaurants, Inc.,
Case No.  94-282-CIV-T-17C.  These  warrants  have been valued by the Company at
$3,000,000.

Note 4:     ACQUISITION

            As of the close of  business  July 1,  1996,  the  Company  acquired
certain general and limited partnership  interests in nine Checkers  restaurants
in the Chicago area, three  wholly-owned  Checkers  Restaurants and other assets
and liabilities as a result of the bankruptcy of Chicago Double Drive-Thru, Inc.
("CDDT").  These  assets  were  received  in lieu of past due  royalties,  notes
receivable  and accrued  interest,  from CDDT which  totalled,  net of reserves,
$2,877,313.  Assets of approximately $7,000,000 and liabilities of approximately
$2,350,000  were  consolidated  into the balance  sheet of the Company as of the
acquisition  date. The Company has not received,  from the  bankruptcy  trustee,
closing financial statements for these partnerships and therefore, the resulting
minority  interests  of  approximately  $1,770,000  along  with  certain  of the
above-mentioned assets and liabilities are subject to adjustment.

            At  September  9,  1996,   long-term  debt  includes  $1,322,255  of
obligations  assumed  as a result  of the  acquisition  of the  assets  of CDDT,
including  an  obligation  to the  Internal  Revenue  Service of $545,000 and an
obligation  to the State of Illinois  Department  of Revenue of  $155,000,  each
subject to interest at 9.125% per year. The remaining  acquired notes ($622,255)
are payable to a Bank and other  parties  with  interest at rates  ranging  from
8.11% to 10.139%.  Non-interest bearing notes payable and permitted encumbrances
of $663,481  related to this  acquisition  are  included in  short-term  accrued
liabilities of the Company as of September 9, 1996.  Other accounts  payable and
accrued  liabilities  incurred by CDDT and its partnerships in the normal course
of business amounting to approximately $350,000 were also recorded in connection
with this acquisition.

            On August 16, 1996, the Company  received  $3,500,000 and a Checkers
Restaurant  in  Washington,  D.C.,  valued at $659,547,  in settlement of a note
receivable of $4,982,355, accrued interest of $319,924, and other receivables of
$278,785.  This  transaction  resulted  in a  non-cash  loss to the  Company  of
$1,421,517 which was offset completely in the Company's  Consolidated  Statement
of Operations by the  elimination  of a deferred  (unrecognized)  gain which had
been  previously  recorded  as a  liability  upon  the  sale of  three  Checkers
Restaurants located in Baltimore,  Maryland on July 28, 1995 when the $4,982,355
note receivable was generated.

Note 5:      ACCOUNTING CHARGES AND LOSS PROVISIONS

            The  Company  recorded  accounting  charges and loss  provisions  of
$16,765,552  during the third quarter of 1996,  $1,249,644 of which consisted of
various  selling,  general and  administrative  expenses.  Provisions  totalling
$14,169,777 to close 27  Restaurants,  relocate 22 of them,  settle 16 leases on
real  property  underlying  these stores and sell land  underlying  the other 11
Restaurants,  and to record  impairment  charges  related  to an  additional  28
under-performing  Restaurants.  Refinancing costs of $845,775 were also recorded
to expense  capitalized costs incurred in connection with the Company's previous
lending  arrangements  with its bank  group.  A provision  of $500,000  was also
recorded to reserve for obsolescence in Champion's finished buildings inventory.

      Third quarter 1995  accounting  charges and loss  provisions of $8,800,000
consisted of $2,833,000 in various selling,  general and administrative expenses
(write-off of  receivables,  accruals for  recruiting  fees,  relocation  costs,
severance pay,  reserves for legal  settlements  and the accrual of legal fees);
$3,192,000 to provide for Restaurant relocation costs, write-downs and abandoned
site  costs;  $344,000  to expense  refinancing  costs;  $645,000 to provide for
inventory obsolescence; $1,500,000 for workers compensation exposure included in
Restaurant  labor  costs and  $259,000  in other  charges,  net,  including  the
$499,000 write-down of excess inventory and a minority interest adjustment.


Note 6:     INCOME TAXES

            The  Company  recorded  income tax  benefits of  $8,561,000  for the
quarter ended  September 9, 1996,  and  $9,659,000  for the three quarters ended
September 9, 1996, respectively, or 38.0% of the losses before income taxes. The
Company then  recorded a valuation  allowance of  $10,284,659  against  deferred
income tax assets as of  September  9, 1996,  resulting  in a net tax expense of
$1,714,659  for the quarter ended  September 9, 1996, and resulting in a net tax
expense  of  $625,659  for the three  quarters  ended  September  9,  1996.  The
Company's total valuation  allowances of $17,900,659 as of September 9, 1996, is
maintained  on deferred  tax assets which the Company has not  determined  to be

                                     14


<PAGE>

more likely than not realizable at this time. A deferred tax asset in the amount
of $2,952,370 is maintained as anticipated operating losses for the current year
will be carried back to obtain a refund of alternative minimum tax paid in prior
years and is therefore more likely than not realizable at this time.  Subject to
a review of the tax assets,  these valuation  allowances will be reversed during
periods in the future in which the Company records  pre-tax  income,  in amounts
necessary to offset any then recorded  income tax expenses  attributable to such
future periods.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Introduction

      The principal  business of the Company is the operation and franchising of
Checkers  Restaurants.  As of  September  9, 1996,  the Company had an ownership
interest in 255  Company-operated  Restaurants and an additional 250 Restaurants
were  operated  by  franchisees.   The  Company's   ownership  interest  in  the
Company-operated  Restaurants is in one of two forms:  (i) the Company owns 100%
of the Restaurant (as of September 9, 1996, there were 241 such Restaurants) and
(ii) the Company owns a  percentage  (10.55% to 75%)  interest in a  partnership
which owns the  Restaurant (a "Joint  Venture  Restaurant")  while the remaining
percentage is owned by a joint venture  partner (as of September 9, 1996,  there
were 14 such Joint Venture Restaurants).

      The Financial  Statements of the Company include the accounts of the Joint
Venture Restaurants and all of the Company's subsidiaries. On February 15, 1994,
one of the Company's former  subsidiaries,  Champion Modular  Restaurant Company
(Champion)  was  merged  into and with the  Company  and  currently  exists as a
division of the Company.

      The Company  receives  revenues from  restaurant  sales,  franchise  fees,
royalties and sales of fully-equipped  manufactured modular restaurant buildings
("Modular  Restaurant  Packages").  Cost of restaurant sales relates to food and
paper costs.  Other  restaurant  expenses include labor and all other restaurant
costs for  Company-operated  Restaurants.  Cost of Modular  Restaurant  Packages
relates to all  restaurant  equipment  and building  materials,  labor and other
direct and indirect costs of production.  Other  expenses,  such as depreciation
and amortization,  and selling, general and administrative expenses, relate both
to  Company-operated   Restaurant  operations  and  Modular  Restaurant  Package
revenues as well as the Company's  franchise  sales and support  functions.  The
Company's  revenues  and  expenses  are  affected  by the  number  and timing of
additional  Restaurant  openings and the sales  volumes of both existing and new
Restaurants.  Modular  Restaurant  Package revenues are directly affected by the
number of new franchise  Restaurant openings and the number of packages produced
for those openings.

Results of Operations

      The  following  table  sets  forth the  percentage  relationship  to total
revenues of the listed items included in the Company's  Consolidated  Statements
of Operations.  Certain items are shown as a percentage of Restaurant  sales and
Modular Restaurant  Package revenue.  The table also sets forth certain selected
restaurant operating data.









                                       15


<PAGE>

<TABLE>
<CAPTION>
                                                           Quarter Ended            Three Quarters Ended
                                                             (unaudited)                  (unaudited)
                                                    ---------------------------------------------------------
                                                          Sept. 9,     Sept. 11,      Sept. 9,      Sept. 11,
                                                            1996          1995          1996           1995
                                                    ---------------------------------------------------------
<S>                                                     <C>          <C>           <C>            <C>  
Revenues:
    Gross restaurant sales                                 96.8%         96.8%         96.9%          96.2%
        Coupons and discounts                               2.8%          2.0%          3.0%           2.4%
                                                    ---------------------------------------------------------
    Net restaurant sales                                   94.1%         94.9%         93.9%          93.8%
    Royalties                                               5.0%          4.5%          4.7%           3.8%
    Franchise fees                                          0.3%          0.5%          0.6%           0.4%
    Modular restaurant packages                             0.7%          0.2%          0.8%           2.0%
                                                    ---------------------------------------------------------
       Total revenues                                     100.0%        100.0%        100.0%         100.0%

Costs and Expenses:
    Restaurant food and paper costs (1)                    34.6%         34.5%         33.5%          34.9%
    Restaurant labor costs (1)                             36.6%         35.3%         34.7%          31.9%
    Restaurant occupancy expense (1)                        8.8%          6.8%          8.0%           6.5%
    Restaurant depreciation and amortization (1)            5.7%          5.4%          5.4%           5.8%
    Advertising expense (1)                                 4.1%          4.6%          3.3%           4.6%
    Other restaurant operating expense (1)                 10.3%          8.7%          9.0%           8.2%
    Costs of modular restaurant package revenues(2)       154.7%        753.6%        154.5%         138.8%
    Other depreciation and amortization                     2.8%          2.3%          2.4%           2.0%
    Selling, general and administrative expense            14.7%         18.6%         11.2%          13.0%
    Impairment of long-lived assets                        22.8%          0.0%          7.4%           0.0%
    Losses on assets to be disposed of                   2312.4%       3901.3%        638.3%         113.6%
    Refinancing costs                                       2.3%          0.8%          0.7%           0.2%
    Provisions for inventory obsolescence                   1.3%          1.5%          0.4%           0.5%
                                                    ---------------------------------------------------------
           Operating loss                                 -57.4%        -24.2%        -19.3%          -9.3%
                                                    ---------------------------------------------------------
Other income (expense):
    Interest income                                         0.3%          0.3%          0.5%           0.3%
    Interest expense                                       -3.8%         -3.2%         -3.5%          -2.9%
    Minority interests                                      0.2%          0.7%          0.0%           0.2%
                                                    ---------------------------------------------------------
       Loss before income tax benefit                     -60.8%        -26.5%        -22.3%         -11.8%
    Income tax expense (benefit)                            4.6%         -9.6%          0.5%          -4.4%
                                                    ---------------------------------------------------------
       Net loss                                           -65.4%        -16.8%        -22.8%          -7.4%
                                                    =========================================================
Operating data:
    System-wide restaurant sales (in 000's):
       Company-operated                                $  34,875     $  41,211     $ 107,201      $ 129,964
       Franchised                                         44,491        49,207       133,788        139,752
                                                    ---------------------------------------------------------
             Total                                     $  79,366     $  90,418     $ 240,989      $ 269,716
                                                    =========================================================

Average annual net sales per restaurant open for a full year (in 000's) (3):            1996           1995
                                                                                  ---------------------------

    Company-operated                                                                    $633           $746
    Franchised                                                                          $787           $818
    System-wide                                                                         $706           $780
                                                                                  ---------------------------
Number of Restaurants (4)
    Company-operated                                                                     255            244
    Franchised                                                                           250            256
                                                                                  ---------------------------
         Total                                                                           505            500
                                                                                  ===========================

(1)    As a percent of gross restaurant sales.
(2)    As a percent of Modular Restaurant Package revenues.
(3)    Includes sales of Restaurants open for entire trailing 13 period year and stores expected to be closed
       in the following year.
(4)    Number of Restaurants open at end of period.

</TABLE>
                                         16


<PAGE>
COMPARISON OF HISTORICAL  RESULTS - QUARTER ENDED  SEPTEMBER 9, 1996 AND QUARTER
ENDED SEPTEMBER 11, 1995

            REVENUES.  Total revenues  decreased  14.7% to  $37,088,000  for the
quarter ended  September 9, 1996 compared to  $43,451,488  for the quarter ended
September 11, 1995.  Company-operated  net restaurant  sales  decreased 15.4% to
$34,875,320  for the quarter ended  September 9, 1996 from  $41,210,771  for the
quarter  ended   September  11,  1995.  Net  restaurant   sales  for  comparable
Company-owned  Restaurants  for the quarter  ended  September 9, 1996  decreased
18.1% compared to the quarter ended September 11, 1995. Comparable Company-owned
Restaurants  are  those  open  at  least  13  periods.  These  decreases  in net
restaurant  sales are primarily  attributable to continuing  sales pressure from
competitors  and the inability of the Company to fund a competitive  advertising
campaign during the period.

            Royalties  decreased  3.6%  to  $1,869,299  for  the  quarter  ended
September 9, 1996, from $1,938,899 for the quarter ended September 11, 1995, due
primarily to a decrease in franchised  restaurant  sales. This decrease resulted
from a net reduction of six franchised Restaurants since September 11, 1995. Net
restaurant  sales for  franchised  Restaurants  open at least 13 periods for the
quarter ended September 9, 1996 decreased 14.7% as compared to the quarter ended
September 11, 1995.

            Franchise  fees  decreased  56.0% to $96,806 for the  quarter  ended
September 9, 1996 from $220,000 for the quarter ended  September 11, 1995.  This
was a result of opening fewer  franchised  Restaurants  during the quarter ended
September 9, 1996.  The Company  recognizes  franchise fees as revenues when the
Company  has  substantially   completed  its  obligations  under  the  franchise
agreement, usually at the opening of the franchised Restaurant.

            Modular Restaurant Package revenues increased 201.4% to $246,575 for
the quarter ended September 9, 1996 from $81,818 for the quarter ended September
11, 1995 due to  increased  sales volume of modular  buildings to a  convenience
store  operator.  Modular  Restaurant  Package  revenues are  recognized  on the
percentage of completion method during the construction  process;  therefore,  a
substantial  portion of the Modular  Restaurant  Package  revenues and costs are
recognized  prior to the opening of a  Restaurant  or shipment to a  convenience
store operator.

            COSTS  AND  EXPENSES.  Restaurant  food  and  paper  costs  totalled
$12,417,171 or 34.6% of gross  restaurant  sales for the quarter ended September
9, 1996,  compared to  $14,503,036  or 34.5% of gross  restaurant  sales for the
quarter  ended  September  11,  1995.  The increase in food and paper costs as a
percentage of gross  restaurant sales was due primarily to various third quarter
1996 promotions, mostly offset by the Company's decrease in beef costs and paper
costs.
            Restaurant  labor  costs,  which  includes   restaurant   employees'
salaries,  wages,  benefits and related taxes,  totalled $13,139,079 or 36.6% of
gross  restaurant  sales for the quarter  ended  September 9, 1996,  compared to
$14,854,113 or 35.3% of gross  restaurant  sales for the quarter ended September
11,  1995.  The  increase in  restaurant  labor costs as a  percentage  of gross
restaurant  sales was due primarily to the decline in average  gross  restaurant
sales  relative  to the  fixed and  semi-variable  nature  of these  costs.  The
decrease in actual  expenses was caused by a provision of $1,500,000 for workers
compensation exposure in the third quarter of 1995.

            Restaurant  occupancy expense,  which includes rent, property taxes,
licenses and insurance,  totalled  $3,170,873 or 8.8% of gross  restaurant sales
for the quarter ended September 9, 1996, compared to $2,859,833 or 6.8% of gross
restaurant  sales for the quarter  ended  September  11, 1995.  This increase in
restaurant  occupancy  costs as a percentage of gross  restaurant  sales was due
primarily to the decline in average gross restaurant sales relative to the fixed
and  semi-  variable  nature  of these  expenses  and also  the  acquisition  of
interests in 12 Restaurants in Chicago.

            Restaurant   depreciation   and   amortization   decreased  8.4%  to
$2,064,464  for the quarter ended  September 9, 1996,  from  $2,254,296  for the
quarter ended  September 11, 1995, due primarily to the adoption of Statement of
Financial  Accounting  Standards No. 121 as of January 1, 1996, partially offset
by a net increase of 11 Company-operated  restaurants from September 11, 1995 to
September 9, 1996.

            Advertising  expense  decreased  to  $1,490,032  or  4.1%  of  gross
restaurant  sales for the quarter ended  September 9, 1996,  from  $1,932,466 or
4.6% of gross  restaurant  sales for the quarter ended  September 11, 1995.  The
decrease in this expense was due to decreased expenditures for advertising.

            Other  restaurant  expenses  includes  all  other  Restaurant  level
operating expenses other than food and paper costs, labor and benefits, rent and
other  occupancy  costs which include  utilities,  maintenance  and other costs.

                                       17

<PAGE>
These expenses  totalled  $3,716,185 or 10.3% of gross  restaurant sales for the
quarter  ended  September  9,  1996  compared  to  $3,655,683  or 8.7% of  gross
restaurant  sales for the quarter ended  September 11, 1995. The increase in the
quarter ended  September 9, 1996 as a percentage of gross  restaurant  sales was
primarily related to the decline in average net restaurant sales relative to the
fixed and  semi-variable  nature of these expenses,  partially offset by reduced
repairs and maintenance expenditures.

            Costs of Modular  Restaurant  Package revenues  totalled $381,541 or
154.7% of Modular Restaurant Package revenues for the quarter ended September 9,
1996,  compared  to $616,580 or 753.6% of such  revenues  for the quarter  ended
September  11,  1995.  Included  in the  third  quarter  of 1995 was a  $499,000
accounting charge to write-down excess  inventories.  The remaining  increase in
these  expenses as a  percentage  of Modular  Restaurant  Package  revenues  was
attributable  to  the  number  of  units  produced  relative  to the  fixed  and
semi-variable nature of many expenses.

            Selling, general and administrative expenses decreased to $5,442,298
or 14.7% of total  revenues,  for the  quarter  ended  September  9, 1996,  from
$8,094,221 or 18.6% of total revenues for the quarter ended  September 11, 1995.
The decrease in these expenses was primarily  attributable  to the third quarter
1995 accounting  charges of $2,833,000,  a reduction in corporate  personnel and
related costs since September 11, 1995, partially offset by a third quarter 1996
bad debt provision of $499,644 and a sales tax audit provision of $750,000.

            ACCOUNTING  CHARGES  AND  LOSS  PROVISIONS.   The  Company  recorded
accounting  charges and loss provisions of $16,765,196  during the third quarter
of 1996, $1,249,644 of which is included in selling,  general and administrative
expenses as discussed above.  Provisions totalling  $14,169,777 were recorded to
close 27 Restaurants, relocate 22 of them, settle 16 leases on real property for
these stores and sell land  underlying  the other 11  Restaurants  and to record
impairment  charges  related to an additional 28  under-performing  Restaurants.
Refinancing  costs of $845,775  were recorded to expense the  capitalized  costs
incurred in connection with its previous lending arrangements and a provision of
$500,000 was recorded to reserve for  obsolescence  within  Champion's  finished
buildings inventory in the third quarter of 1996.

            Third  quarter  1995  accounting  charges  and  loss  provisions  of
$8,800,000   consisted   of   $2,833,000   in  various   selling,   general  and
administrative expenses (write-off of receivables, accruals for recruiting fees,
relocation costs,  severance pay, reserves for legal settlements and the accrual
of  legal  fees);   $3,192,000  to  provide  for  Restaurant  relocation  costs,
write-downs  and abandoned site costs;  $344,000 to expense  refinancing  costs;
$645,000  to  provide  for  inventory   obsolescence;   $1,500,000  for  workers
compensation  exposure  included in Restaurant labor costs and $259,000 in other
charges,  net,  including  the $499,000  write-down  of excess  inventory  and a
minority interest adjustment.

            INTEREST  EXPENSE.  Interest expense increased to $1,407,270 or 3.8%
of total revenues for the quarter ended  September 9, 1996,  from  $1,403,748 or
3.2% of total revenues for the quarter ended  September 11, 1995.  This increase
was due to an increase in the Company's effective interest rates.

            MINORITY  INTEREST  IN  EARNINGS.   The  Company  recorded  minority
interest in earnings  (losses) of ($55,907) for the quarter  ended  September 9,
1996, as compared to minority  interest in earnings  (losses) of ($293,034)  for
the  quarter  ended  September  11,  1995.  The change in  minority  interest in
earnings  (losses) for the quarter  ended  September 9, 1996 is due primarily to
the third quarter 1995 accounting charges and loss provisions.

            INCOME TAX  BENEFIT.  Due to the loss for the  quarter,  the Company
recorded an income tax benefit of  $8,561,000 or 38.0% of the loss before income
taxes and recorded a deferred  income tax  valuation  allowance  of  $10,275,659
resulting in a net tax expense of $1,714,659 for the quarter ended  September 9,
1996,  as compared to an income tax benefit of  $4,188,000  or 36.4% of earnings
before income taxes for the quarter ended  September 11, 1995. The effective tax
rates  differ from the  expected  federal tax rate of 35.0% due to state  income
taxes and job tax credits.

            NET  LOSS.   Earnings  were  significantly   impacted  by  the  loss
provisions  which were  recorded in the third  quarters of 1996 and 1995 and the
write-downs  associated  with SFAS 121 in the third  quarter  of 1996.  Net loss
before tax and the  provisions  (provisions  totalled  $16,765,196  in the third
quarter of 1996 and  $8,800,000 in the third quarter of 1995) was  $5,762,871 or
$.11 per share for the quarter  ended  September 9, 1996 and  $2,699,623 or $.05
per share for the quarter ended  September 11, 1995,  which  resulted  primarily
from a decrease in the average net restaurant sales and margins,  and a decrease
in  royalties  and  franchise  fees,  offset by a decrease in  depreciation  and
amortization and selling, general and administrative expenses.

                                       18


<PAGE>
COMPARISON OF HISTORICAL  RESULTS - THREE QUARTERS  ENDED  SEPTEMBER 9, 1996 AND
THREE QUARTERS ENDED SEPTEMBER 11, 1995

            Revenues.  Total revenues  decreased 17.5% to  $114,160,708  for the
three quarters ended  September 9, 1996 compared to  $138,418,818  for the three
quarters  ended  September  11,  1995.  Company-operated  net  restaurant  sales
decreased  17.4% to  $107,193,134  for the quarters ended September 9, 1996 from
$129,841,574  for the  three  quarters  ended  September  11,  1995.  Comparable
Company-operated restaurant sales for the three quarters ended September 9, 1996
decreased  16.4%  compared  to the three  quarters  ended  September  11,  1995.
Comparable  restaurants  are those open at least 13 periods.  These decreases in
net restaurant  sales are primarily  attributable  to continuing  sales pressure
from  competitors and severe weather  conditions in January and February of 1996
and the  inability  of the Company to fund a  competitive  advertising  campaign
during the second quarter of 1996.

            Royalties  increased  4.0%  to  $5,394,605  for the  quarters  ended
September 9, 1996,  from  $5,187,205 for the quarters ended  September 11, 1995,
due primarily to an increase in franchised  restaurant  sales. This increase was
partially  offset  by a  net  reduction  of  six  franchised  Restaurants  since
September 11, 1995.  Comparable franchised restaurant sales for Restaurants open
at least 13 periods for the three  quarters  ended  September 9, 1996  decreased
13.3% as compared to the three quarters ended September 11, 1995.

            Franchise  fees  increased  16.9% to $679,662 for the three quarters
ended September 9, 1996 from $581,250 for the three quarters ended September 11,
1995.  This was a result of  recording  $390,000 of revenue  (related  costs are
included in selling,  general and  administrative  expenses as discussed  below)
from terminations of Area Development  Agreements net of the impact from opening
fewer franchised  Restaurants during the three quarters ended September 9, 1996.
The  Company  recognizes  franchise  fees  as  revenues  when  the  Company  has
substantially  completed its obligations under the franchise agreement,  usually
at the opening of the franchised Restaurant.

            Modular  Restaurant Package revenues decreased 68.2% to $893,307 for
the  three  quarters  ended  September  9, 1996  from  $2,808,789  for the three
quarters  ended  September  11, 1995 due to  decreased  sales  volume of Modular
Restaurant Package to the Company's franchisees and the utilization of available
used Modular Restaurant  Packages to satisfy orders.  Modular Restaurant Package
revenues are  recognized  on the  percentage  of  completion  method  during the
construction process; therefore, a substantial portion of the Modular Restaurant
Package revenues are recognized prior to the opening of a Restaurant.

            COSTS  AND  EXPENSES.  Restaurant  food  and  paper  costs  totalled
$37,080,333  or 33.5% of gross  restaurant  sales for the three  quarters  ended
September 9, 1996,  compared to $46,490,656 or 34.9% of gross  restaurant  sales
for the three quarters ended  September 11, 1995. The decrease in food and paper
costs as a  percentage  of  gross  restaurant  sales  was due  primarily  to the
Company's  decrease in beef costs and paper costs,  partially  offset by various
promotions during the third quarter of 1996.

            Restaurant  labor  costs,  which  includes   restaurant   employees'
salaries,  wages,  benefits and related taxes,  totalled $38,341,282 or 34.7% of
gross restaurant sales for the three quarters ended September 9, 1996,  compared
to $42,523,123 or 31.9% of gross  restaurant  sales for the three quarters ended
September 11, 1995.  The increase in  restaurant  labor costs as a percentage of
gross  restaurant  sales was due  primarily  to the  decline  in  average  gross
restaurant sales relative to the fixed and semi-variable  nature of these costs.
The  decrease  in actual  expense was caused by a provision  of  $1,500,000  for
workers  compensation  exposure in the third  quarter of 1995 and a reduction in
the variable portion of labor expenses as sales declined.

            Restaurant  occupancy expense,  which includes rent, property taxes,
licenses and insurance,  totalled  $8,827,327 or 8.0% of gross  restaurant sales
for the three quarters ended  September 9, 1996,  compared to $8,638,776 or 6.5%
of gross  restaurant sales for the three quarters ended September 11, 1995. This
increase in restaurant occupancy costs as a percentage of gross restaurant sales
was due primarily to the decline in average gross  restaurant  sales relative to
the fixed and semi-variable nature of these expenses and also the acquisition of
interests in 12 Restaurants in Chicago.

            Restaurant   depreciation  and   amortization   decreased  22.0%  to
$6,022,873 for the three quarters ended  September 9, 1996,  from $7,717,781 for
the three  quarters  ended  September 11, 1995, due primarily to the adoption of
Statement of Financial Accounting Standards No. 121 as of January 1, 1996.

            Advertising  decreased to $3,596,959 or 3.3% of restaurant sales for
the  three  quarters  ended  September  9,  1996,  from  $6,165,166  or  4.6% of
restaurant  sales for the quarter ended September 11, 1995. The decrease in this
expense was due to decreased expenditures for advertising.

                                       19

<PAGE>
Other  restaurant  expenses  includes  all  other  Restaurant  level
operating expenses other than food and paper costs, labor and benefits, rent and
other  costs  which  includes  utilities,  maintenance  and other  costs.  These
expenses  totalled  $9,954,279 or 9.0% of gross  restaurant  sales for the three
quarters  ended  September  9, 1996  compared  to  $10,930,410  or 8.2% of gross
restaurant  sales for the three quarters ended  September 11, 1995. The increase
in the  three  quarters  ended  September  9,  1996  as a  percentage  of  gross
restaurant  sales,  was  primarily  related  to the  decline  in  average  gross
restaurant  sales  relative  to the  fixed  and  semi-variable  nature  of  many
expenses.

            Costs of Modular Restaurant Package revenues totalled  $1,379,920 or
154.5% of Modular  Restaurant  Package  revenues  for the three  quarters  ended
September 9, 1996,  compared to  $3,897,224  or 138.8% of such  revenues for the
three  quarters  ended  September 11, 1995.  The increase in these expenses as a
percentage  of Modular  Restaurant  Package  revenues  was  attributable  to the
decline in the number of units produced  relative to the fixed and semi-variable
nature of many  expenses  partially  offset by a third  quarter 1995  accounting
charge of $499,000 to write-down excess inventories. The Company and franchisees
opened fewer  restaurants for the three quarters ended September 9, 1996 than in
the comparable period of 1995.

            Selling,   general  and   administrative   expenses   decreased   to
$12,738,827 or 11.2% of total revenues, for the quarter ended September 9, 1996,
from  $17,948,967  or 13.0% of  total  revenues  for the  three  quarters  ended
September 11, 1995. The decrease in these expenses was primarily attributable to
third quarter 1995  accounting  charges and loss  provisions of $2,833,000,  the
reduction in  corporate  personnel  and related  costs  partially  offset by the
recognition  to expense  of  previously  deferred  franchise  costs of  $115,657
associated with the above-mentioned $390,000 of income from terminations of Area
Development  Agreements and third quarter 1996 accounting  charges of $1,249,644
included in this category.

            ACCOUNTING  CHARGES  AND  LOSS  PROVISIONS.   The  Company  recorded
accounting  charges and loss provisions of $16,765,552  during the third quarter
of 1996, $1,249,644 of which is included in selling,  general and administrative
expenses as discussed above.  Provisions totalling  $14,169,777 were recorded to
close 27 Restaurants, relocate 22 of them, settle 16 leases on real property for
these stores and sell land  underlying the other 11  Restaurants,  and to record
impairment  charges  related to an additional 28  under-performing  Restaurants.
Refinancing  costs of $845,775  were also  recorded  to expense the  capitalized
costs  incurred in  connection  with its  previous  lending  arrangements  and a
provision of $500,000 was recorded to reserve for obsolescence within Champion's
finished buildings inventory in the third quarter of 1996.

            Third  quarter  1995  accounting  charges  and  loss  provisions  of
$8,800,000   consisted   of   $2,833,000   in  various   selling,   general  and
administrative expenses (write-off of receivables, accruals for recruiting fees,
relocation costs,  severance pay, reserves for legal settlements and the accrual
of  legal  fees);   $3,192,000  to  provide  for  Restaurant  relocation  costs,
write-downs  and abandoned site costs;  $344,000 to expense  refinancing  costs;
$645,000  to  provide  for  inventory   obsolescence;   $1,500,000  for  workers
compensation  exposure  included in Restaurant labor costs and $259,000 in other
charges,  net,  including  the $499,000  write-down  of excess  inventory  and a
minority interest adjustment.

            INTEREST  EXPENSE.  Interest expense decreased to $4,012,518 or 3.5%
of  total  revenues  for the  three  quarters  ended  September  9,  1996,  from
$4,050,628 or 2.9% of total revenues for the three quarters ended  September 11,
1995.  This  decrease  was  due  to  a  lower  average  debt  principal  balance
outstanding  during  the  three  quarters  ended  September  9, 1996 than in the
comparable  quarter of 1995,  partially  offset by an increase in the  Company's
effective interest rates.

            MINORITY  INTEREST  IN  EARNINGS.   The  Company  recorded  minority
interest in earnings of $10,475 for the three quarters ended  September 9, 1996,
as compared to minority  interest  in earnings  (losses) of  ($221,073)  for the
three  quarters ended  September 11, 1995. The increase in minority  interest in
earnings  for the  quarter  ended  September  9,  1996 is due  primarily  to the
increase in the number of joint venture Restaurants at September 9, 1996 and the
third quarter 1995 accounting charges and loss provisions.

            INCOME  TAX  BENEFIT.  Due to the loss for the three  quarters,  the
Company recorded an income tax benefit of $9,659,000 or 38.0% of the loss before
income  taxes  and  recorded  a  deferred  income  tax  valuation  allowance  of
$10,284,659,  resulting in a net tax expense of $625,659 for the three  quarters
ended  September 9, 1996,  as compared to an income tax benefit of $6,058,000 or
37.2% of earnings before income taxes for the three quarters ended September 11,
1995. The effective tax rates differ from the expected federal tax rate of 35.0%
due to state income taxes and job tax credits.

                                       20

<PAGE>
NET  LOSS.   Earnings  were  significantly   impacted  by  the  loss
provisions  which were  recorded in the third  quarters of 1996 and 1995 and the
write-downs  associated  with SFAS 121 in the third  quarter  of 1996.  Net loss
before tax and the  provisions  (provisions  totalled  $16,765,196  in the third
quarter of 1996 and  $8,800,000 in the third quarter of 1995) was  $8,652,487 or
$.17 per share for the three quarters ended  September 9, 1996 and $7,493,293 or
$.15 per share for the three quarters ended  September 11, 1995,  which resulted
primarily from a decrease in the average net Restaurant sales and margins, and a
decrease in royalties and franchise  fees,  offset by a decrease in depreciation
and amortization and selling, general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

            Prior  to the IPO in  November  1991,  the  primary  sources  of the
Company's  liquidity and capital  resources were cash flows from  operations and
bank  financing,  as well as capital and  operating  leases.  Following the IPO,
until  approximately late 1993, the Company utilized the proceeds of the IPO and
its second  public  stock  offering in May 1992,  in addition to cash flows from
operations, to provide funds for operations and capital expenditures.  Beginning
in late 1993, the proceeds from the two stock offerings had been fully utilized,
and the Company  negotiated a credit  facility with a group of banks,  described
below,  to  provide  additional  funds  primarily  for  the  development  of new
Restaurants.

            On October 28, 1993, the Company  entered into a loan agreement with
a group of banks ("Loan Agreement") providing for an unsecured, revolving credit
facility.  The Company borrowed  approximately  $50,000,000  under this facility
primarily  to open  new  Restaurants  and pay off  approximately  $4,000,000  of
previously existing debt.

            The Company  subsequently  arranged  for this Loan  Agreement  to be
converted to a term loan and  collateralized  the loan with substantially all of
the  Company's  assets.  The term loan  requires  monthly  principal  reductions
continuing through July 1998.  Beginning in the fifth period of 1996,  principal
payments  are  the greater of fixed  monthly  amounts or a formula based on Cash
Flow as  defined  under the Loan  Agreement.  The  remaining  aggregate  minimum
principal repayments are $5,600,000 in 1996,  $7,800,000 in 1997, $4,200,000 for
the period January  through July 1998 and a balloon  payment of $18,218,099  due
July 31,  1998.  Interest  is  payable  monthly  at the prime  rate  plus  2.5%.
Dividends  are  prohibited,  and the Company is  required  to  maintain  certain
financial ratios under the Loan Agreement.

            In early  July  1996,  DDJ  Capital  Management  LLC  ("DDJ")  began
negotiating  with  the bank  group  for an  assignment  to it of all of the bank
group's rights under the Loan Agreement.  Anticipating  the transfer of the Loan
Agreement  and the debt  thereunder,  and due to  impairment of its current cash
flow due to  reduced  sales  revenues,  the  Company  did not make the  $500,000
principal  payment due under the Loan  Agreement on July 15,  1996.  On July 29,
1996,  the  Company and the bank group  entered  into an  amendment  to the Loan
Agreement providing for the assignment of all the rights of the bank group under
the loan Agreement to The Galileo Fund, L.P. of Boston,  Massachusetts ("Galileo
Fund"),  an affiliate of DDJ. The amendment also provided for a temporary waiver
of all  defaults  (the July 15  payment  default  and  failure  to meet  certain
financial  covenants  at the end of the second  fiscal  quarter)  by the Company
under the Loan  Agreement.  Upon the  assignment  of the Loan  Agreement  to it,
Galileo  Fund  immediately  assigned  a  portion  of its  interests  in the Loan
Agreement and the amounts due thereunder to Foothill Capital  Corporation of Los
Angeles,  California, Pearl Street L.P. (a division of Goldman, Sachs & Company)
of New  York,  New York and  Canpartners  Investments  IV,  LLC of Los  Angeles,
California (collectively, with Galileo Fund, the "Investor Group").

            On September 17, 1996, the Company reached an agreement in principal
on debt  restructuring with the Investor Group.  Pursuant to such agreement,  if
consummated, the term of the credit facility will be  extended by one year until
July 31, 1999. The agreement  provides that no principal  payments are scheduled
through the first reporting period of 1997. In reporting  periods 2 through 8 of
1997, the Company is scheduled to make minimum principal  reduction  payments of
$200,000 per period.  Those payments increase to $275,000 in reporting periods 9
through 13 in 1997,  and to $350,000 until July 31, 1999. The Company has agreed
to a fixed  interest  rate of 13.75%  per  annum.  Additionally,  the  agreement
provides for a restructuring fee of $4.0 million payable at maturity,  which can
be converted  into common stock at the option of the Company and/or the Investor
Group under  certain  specified  circumstances.  The  September  17 agreement in
principle contains  financial  covenants that the Company is currently unable to
meet.  Management has attempted to  renegotiate  these  financial  covenants and
obtain  definitive   documentation   from  the  Investor  Group,  but  has  been
unsuccessful  to date in this effort.  The Investor Group has recently  informed
the Company that they are considering  selling the Company's debt to other third
parties, which include companies with affiliates in the restaurant business, and

                                         21


<PAGE>
management  believes that this  potential  sale has caused the Investor Group to
delay  finalizing a restructuring of the debt. The Investor Group has granted an
extension of their waiver of the  Company's  defaults  under the Loan  Agreement
through  November  8, 1996.  Although  management  intends to continue to seek a
restructuring  of  the  Company's  debt  with  the  Investor  Group  and/or  any
subsequent purchaser of the debt, as well as financing from other third parties,
there can be no assurance that a restructuring  basically on the terms set forth
in the agreement in principle (with  appropriate  modifications to the financial
covenants), or on other terms acceptable to the Company, will be consummated, or
that the Company will be able to obtain any other financing source.  The Company
does not  currently  have the ability to cure the payment  defaults or financial
covenant  defaults  that have  occurred and been waived to date.  The Company is
currently in active  discussions with several third parties concerning a variety
of potential strategic transactions. There can be no assurance that any of these
discussions  will result in the  consummation  of any particular  transaction or
what form the transaction might take; however, the Company's current focus is on
a transaction  that would provide the Company with  additional  liquidity and an
opportunity for future growth, without a change in control of the Company.

            On August 2, 1995, the Company entered into a purchase agreement (as
amended  in  October  1995 and April  1996,  the  "Rall-Folks  Agreement")  with
Rall-Folks,  Inc.  ("Rall-Folks")  pursuant to which the Company agreed to issue
shares of its Common Stock in exchange for and in complete satisfaction of three
promissory notes of the Company held by Rall- Folks (the "Rall-Folks Notes"). On
the closing date,  the Company will deliver to  Rall-Folks  shares of its Common
Stock  with a  value  equal  to the  then  outstanding  balance  due  under  the
Rall-Folks  Notes  (the  "Rall-Folks  Purchase  Price").  The  total  amount  of
principal outstanding under the Rall-Folks Notes was approximately $1,788,000 as
of  September  9,  1996.  The  Rall-Folks  Notes are fully  subordinated  to the
Company's existing debt with the Investor Group.

            Under the terms of the Rall-Folks Agreement,  the Company guaranteed
that if Rall-Folks sells all of the Common Stock issued for the Rall-Folks Notes
in a reasonably prompt manner (subject to certain  limitations  described below)
Rall-Folks  will receive net  proceeds  from the sale of such stock equal to the
Rall-Folks  Purchase  Price. If Rall-Folks  receives less than such amount,  the
Company  will  issue to  Rall-Folks,  at the  option of  Rall-Folks,  either (i)
additional  shares of Common Stock, to be sold by Rall-Folks,  until  Rall-Folks
receives an amount equal to the Rall-Folks  Purchase  Price, or (ii) a six-month
promissory note bearing interest at 11%, with all principal and accrued interest
due at maturity,  and  subordinated  to the Company's  bank debt pursuant to the
same  subordination  provisions,  equal to the difference between the Rall-Folks
Purchase  Price and the net amount  received by Rall-Folks  from the sale of the
Common Stock.

            On August 3, 1995, the Company entered into a purchase agreement (as
amended in October 1995 and April 1996,  the "RDG  Agreement")  with  Restaurant
Development  Group,  Inc.  ("RDG") pursuant to which the Company agreed to issue
shares of its Common  Stock in exchange  for and in complete  satisfaction  of a
promissory note of the Company held by RDG (the "RDG Note"). The total amount of
principal  outstanding  under the RDG Note was  approximately  $1,693,000  as of
September 9, 1996. The RDG Note is fully  subordinated to the Company's existing
debt with the Investor Group.  In partial consideration  of the  transfer of the
RDG Note to the Company,  the Company will deliver to RDG shares of Common Stock
with a value equal to the sum of (i) the  outstanding  balance due under the RDG
Note on the closing date and (ii) $10,000 (being the estimated legal expenses of
RDG to be incurred in  connection  with the  registration  of the Common  Stock)
(the "RDG Purchase Price").

            As further  consideration  for the  transfer  of the RDG Note to the
Company,  the  Company  agreed to issue RDG a warrant  (the  "Warrant")  for the
purchase  of  120,000  shares of Common  Stock at a price  equal to the  average
closing  sale price of the Common  Stock for the ten full trading days ending on
the third  business day  immediately  preceding  the closing date (such price is
referred  to a the  "Average  Closing  Price");  however,  in the event that the
average  closing  price of the  Common  Stock  for the 90 day  period  after the
closing date is less than the Average Closing Price,  the purchase price for the
Common Stock under the Warrant will be changed on the 91st day after the closing
date to the average  closing  price for such 90 day period.  The Warrant will be
exercisable at any time within five years after the closing date.

            Under the terms of the RDG  Agreement,  the Company  has  guaranteed
that if RDG  sells  all of  such  Common  Stock  issued  for  the RDG  Note in a
reasonably prompt manner (subject to certain  limitations  described below), RDG
will receive net  proceeds  from the sale of such stock equal to at least 80% of
the RDG Purchase Price. If RDG receives less than such amount,  the Company will
issue  additional  shares of Common  Stock to RDG, to be sold by RDG,  until RDG
receives an amount equal to 80% of the Purchase Price.


                                       22

<PAGE>
            The  Rall-Folks  Notes and the RDG Notes were due on August 4, 1995.
Pursuant to the Rall-Folks Agreement and the RDG Agreement, the Rall-Folks Notes
and the RDG Note were to be acquired by the Company in exchange for Common Stock
on or before  September 30, 1995. The Company and Rall-Folks and RDG amended the
Rall-  Folks  Agreement  and the RDG  Agreement,  respectively,  to allow  for a
closing in May 1996 (subject to extension in the event closing is delayed due to
review by the Securities and Exchange  Commission of the registration  statement
covering the Common  Stock to be issued in the  transaction).  The  transactions
with  Rall-Folks  and RDG have  been  delayed  due to the  Company's  continuing
negotiations  with  the  Investor  Group  concerning  the  restructuring  of the
Company's debt.  Each of the parties  currently has the right to terminate their
respective Agreement.

            Pursuant to the Rall-Folks Agreement and the RDG Agreement, the term
of the Notes will be extended until the earlier of the closing of the repurchase
of the Notes or until  approximately  one month  after  the  termination  of the
applicable  Agreement  by a party in  accordance  with  its  terms.  Closing  is
contingent upon a number of conditions,  including the prior  registration under
the federal and state  securities  laws of the Common Stock to be issued and the
subsequent approval of the transaction by the stockholders of Rall-Folks and RDG
of their respective transactions.  In the event the Company complies with all of
its  obligations  under  the  Rall-Folks   Agreement  and  the  stockholders  of
Rall-Folks do not approve the transaction, the term of the Rall-Folks Notes will

be extended until  December 1996. In the event the Company  complies with all of
its  obligations  under the RDG  Agreement  and the  stockholders  of RDG do not
approve the transaction, the term of the RDG Note will be extended approximately
one year.
            Under the terms of the  Rall-Folks  Agreement and the RDG Agreement,
if the transaction  contemplated  therein is consummated,  so long as Rall-Folks
and RDG, respectively,  is attempting to sell the Common Stock issued to it in a
reasonably  prompt manner  (subject to the  limitations  described  below),  the
Company is obligated  to pay to it in cash an amount each quarter  equal to 2.5%
of the value of the Common Stock held by it on such date (such value being based
upon the value of the Common Stock when issued to it).

            On  April  12,  1996,  the  Company  entered  into a Note  Repayment
Agreement (the "NTDT Agreement") with Nashville Twin Drive-Thru  Partners,  L.P.
("NTDT")  pursuant to which the Company may issue  shares of its Common Stock in
exchange for and in complete  satisfaction  of a promissory  note of the Company
held by NTDT which matured on April 30, 1996 (the "NTDT Note"). The Company will
issue  shares of Common Stock to NTDT in blocks of two hundred  thousand  shares
each,  which will be valued at the closing  price of the Common Stock on the day
prior to the date they are delivered to NTDT (such date is hereinafter  referred
to as the  "Delivery  Date"  and the value of the  Common  Stock on such date is
hereinafter  referred to as the "Fair Value").  The amount outstanding under the
NTDT Note will be reduced by the Fair  Value of the stock  delivered  to NTDT on
each  Delivery  Date.  The Company is obligated to register each block of Common
Stock for resale by NTDT under the federal  and state  securities  laws,  and to
keep such  registration  effective for a sufficient  length of time to allow the
sale of the block of Common Stock,  subject to  limitations  on sales imposed by
the Company  described below. As each block of Common Stock is sold, the Company
will issue another block,  to be registered  for resale and sold by NTDT,  until
NTDT  receives  net  proceeds  from the sale of such  Common  Stock equal to the
balance due under the NTDT Note.  The Company  will  continue to pay interest in
cash on the  outstanding  principal  balance due under the NTDT Note through the
date on  which  NTDT  receives  net  proceeds  from  the  sale of  Common  Stock
sufficient  to repay the  principal  balance of the NTDT Note.  On each Delivery
Date  and on the  same  day of  each  month  thereafter  if NTDT  holds  on such
subsequent date any unsold shares of Common Stock,  the Company will also pay to
NTDT in cash an amount  equal to .833% of the Fair Value of the shares of Common
Stock  issued  to NTDT as part of such  Block of Stock  and held by NTDT on such
date.  Once the NTDT Note has been repaid in full,  NTDT is  obligated to return
any  excess  proceeds  or shares of Common  Stock to the  Company.  The  Company
delivered  the first  block of 200,000  shares  with a fair value of $228,125 to
NTDT on April 18, 1996. The total amount of principal outstanding under the NTDT
Note was  approximately  $1,126,162  as of September  9, 1996.  The NTDT Note is
fully  subordinated to the Company's  existing debt with the Investor Group. The
term of the NTDT  Note  will be  extended  until  May 31,  1997,  so long as the
Company is complying with its obligations  under the NTDT Agreement and NTDT has
received at least  $1,000,000  from the sale of the Common  Stock by January 31,
1997. Due to the delay in registering  the Common Stock issued to NTDT caused by
the  renegotiation of the Company's debt with the Investor Group, it is doubtful
that  $1,000,000  could be received by NTDT from the sale of Common  Stock under
the terms of the NTDT  Agreement by January 31, 1997.  There can be no assurance
as to what  action,  if any,  NTDT will take as a result.  In the event that the
Company  files  a  voluntary  bankruptcy  petition,  an  involuntary  bankruptcy
petition  is filed  against  the Company  and not  dismissed  within 60 days,  a
receiver or trustee is appointed for the Company's assets,  the Company makes an
assignment of substantially  all of its assets for the benefit of its creditors,

                                       23

<PAGE>
trading in the Common Stock is suspended  for more than 14 days,  or the Company
fails to comply with its obligations  under the NTDT Agreement,  the outstanding
balance due under the NTDT Note will become due and NTDT may thereafter  seek to
enforce the NTDT Note.

            In order to promote an orderly  distribution  of any Common Stock to
be issued to and sold by  Rall-Folks,  RDG and NTDT, the Company has imposed the
following limits on the sales that may be made by Rall-Folks,  RDG and NTDT: (i)
each may sell not more than 50,000  shares of Common Stock per week  (150,000 in
the aggregate) and (ii) each may sell not more than 25,000 shares in any one day
(75,000 shares in the aggregate),  provided that each may sell additional shares
in excess of such limits if such  additional  shares are sold at a price  higher
than the lowest then current bid price for the Common Stock.  See "Risk Factors"
below for a discussion of certain risks  associated  with the proposed  sales of
such Common Stock by Rall-Folks, RDG and NTDT.

            The consummation of the transaction with each of RDG, Rall-Folks and
NTDT has been delayed by the  assignment  of the Loan  Agreement to the Investor
Group and the renegotiation of the Loan Agreement.  Pursuant to the terms of the
current  Loan  Agreement,  the  Company is  obligated  to  purchase or repay the
Rall-Folks Notes, the RDG Note and the NTDT Note using Common Stock, and may not
repay them or make  arrangements to repay them in cash. The Company is unable to
predict at this time what arrangements may be negotiated with the Investor Group
with respect to the Company's  obligations  under the  agreements and notes with
RDG,  Rall-Folks  and NTDT. In the event that the Company is unable to negotiate
an amendment to the Loan  Agreement  that is mutually  acceptable to the Company
and the Investor Group, the Company will likely default under the Loan Agreement
and be unable to consummate the currently  contemplated  transactions  with RDG,
Rall-Folks, and NTDT and will, therefore, likely default under the RDG Note, the
Rall-Folks Notes and the NTDT Note.

            The Company  currently  has no plans to develop  additional  Company
Restaurants,  although the joint  venture of  Restaurants  through the Company's
contribution of closed Restaurant buildings remains an expansion alternative.

            The Company has previously had  significant  working  capital due to
the proceeds from its two public stock offerings. As of December 31, 1993, these
proceeds had been utilized to purchase  long-term  property and  equipment.  The
Company  had  negative  working  capital of  $17,628,030  at  September  9, 1996
(determined by  subtracting  current  liabilities  from current  assets).  It is
anticipated  that negative  working  capital for the Company will continue to be
the  case  since  approximately  83.7% of the  Company's  assets  are  long-term
(property,  equipment,  goodwill  and  other),  and  since all  operating  trade
payables,  accrued  expenses,  and property and  equipment  payables are current
liabilities  of the  Company.  The  Company  has not  reported  a profit for any
quarter since September 1994.

            The Company has  implemented  numerous  cost cutting and  efficiency
enhancing  programs.  The focus was to create strategic alliances in several key
purchasing and service areas along with leveraging system wide service contracts
for Company  Restaurants.  Overall,  the Company believes fundamental steps have
been taken to improve the Company's performance,  as evidenced by the decline in
selling,  general and  administrative  expenses  from  $5,261,221 in the quarter
ended September 11, 1995, (after adjusting for accounting charges of $2,833,000)
to  $4,192,654  in the quarter  ended  September  9, 1996 (after  adjusting  for
accounting charges of $1,249,644). This represents a decline from 12.1% of total
revenue in last  year's  third  quarter  to 11.3% in the  current  period.  On a
year-to-date basis, selling,  general and administrative  expenses also declined
from  $15,115,967  after  adjusting for the  above-mentioned  account charges to
$11,373,526 after adjusting for the above-mentioned  accounting charges taken in
the current  period and  $115,657  taken  earlier  this fiscal  year.  This also
represents a decline from 10.9% of total  revenue for the three  quarters  ended
September  11,  1995,  to 10.0% of total  revenue for the three  quarters  ended
September 9, 1996.

            In light of the current level of revenues,  management believes that
cash flows from  operations  would be sufficient to allow the Company to pay its
operating expenses and the reductions  currently required to be made in 1996 and
1997  under the  agreement  in  principle  reached  with the  Investor  Group on
September 17, 1996,  relating to the  restructuring  of the Company's debt under
the Loan Agreement, and the Company's other long-term debt obligations. However,
the September 17 agreement in principle  contains  financial  covenants that the
Company is currently  unable to meet.  Management  has attempted to  renegotiate
these financial covenants and obtain definitive  documentation from the Investor
Group, but has been unsuccessful to date in this effort.  The Investor Group has
recently  informed the Company that they are  considering  selling the Company's
debt to other third  parties,  which include  companies  with  affiliates in the
restaurant business, and management believes that this potential sale has caused
the Investor Group to delay finalizing a restructuring of the debt. The Investor
Group has granted an extension of their waiver of the Company's  defaults  under

                                       24

<PAGE>
the Loan Agreement  through  November 8, 1996.  Although  management  intends to
continue to seek a  restructuring  of the Company's debt with the Investor Group
and/or any  subsequent  purchaser of the debt,  as well as financing  from other
third parties,  there can be no assurance that a restructuring  basically on the
terms set forth in the agreement in principle (with appropriate modifications to
the financial  covenants),  or on other terms acceptable to the Company, will be
consummated,  or that the  Company  will be able to obtain  any other  financing
source.  The  Company  does not  currently  have the ability to cure the payment
defaults or financial  covenant  defaults  that have occurred and been waived to
date. The Company is currently in active  discussions with several third parties
concerning  a  variety  of  potential  strategic  transactions.  There can be no
assurance that any of these  discussions  will result in the consummation of any
particular  transaction or what form the transaction  might take;  however,  the
Company's  current focus is on a transaction that would provide the Company with
additional  liquidity and an opportunity for future growth,  without a change in
control of the Company.

            Management   also  believes  that  without   additional   funds  for
advertising and  maintenance,  revenues will continue to be adversely  affected,
further decreasing the ability of the Company to pay its obligations. Management
is,  therefore,  also seeking to improve its current liquidity by selling assets
and seeking additional funds from the Investor Group or the purchasers,  if any,
of the credit facility.  Following any successful  renegotiation of the terms of
the Loan Agreement,  the Company must also successfully  consummate the purchase
of the Rall-Folks Notes, the RDG Note and the NTDT Note for Common Stock.  There
can be no assurance that the Company will be able to do so and if it cannot, and
if the Company is unable to reach some other  arrangements with Rall-Folks,  RDG
or NTDT, the Company will likely default in its payment  obligations  under such
Note or Notes,  and will likely be put into default  under the terms of the Loan
Agreement.

INFLATION
            The Company does not believe  inflation has had a material impact on
earnings.  Substantial increases in costs could have a significant impact on the
Company and the industry. If operating expenses increase, management believes it
can recover  increased costs by increasing prices to the extent deemed advisable
considering competition.

SEASONALITY
            The seasonality of restaurant sales due to consumer  spending habits
can be  significantly  affected  by the timing of  advertising  and  competitive
market  conditions.  While  certain  quarters  can be stronger,  or weaker,  for
restaurant  sales  when  compared  to other  quarters,  there is no  predominant
pattern.

SAFE HARBOR STATEMENT

            Except  for  historical  information,   statements  in  this  Report
constitute  forward-looking  statements within the meaning of Section 27A of the
Securities  Act,  and Section 21E of the  Securities  Exchange  Act of 1934,  as
amended.  These  statements  appear in a number of  places  in this  Report  and
include statements  regarding the intent,  belief or current expectations of the
Company,  its Directors or its Officers with respect to, among other things: (i)
the Company's financing plans and contingencies relating to the restructuring of
its existing  debt;  (ii) trends  affecting  the Company's  business,  financial
condition or results of operation;  and (iii) the Company's  growth strategy and
operating  strategy.  Investors  are  cautioned  that any  such  forward-looking
statements  are not  guarantees  of future  performance  and  involve  risks and
uncertainties,  and  that  actual  results  may  differ  materially  from  those
projected in the forward-looking  statements as a result of various factors. The
information  set forth  above  under  Management's  Discussion  and  Analysis of
Financial  Condition and Results of Operation,  as well as the factors discussed
below, identify important factors that could cause such differences.

GENERAL
            The Company's prior operating results are not necessarily indicative
of future results.  The Company's future operating  results may be affected by a
number of factors, including: the Company's ability to effect a restructuring of
the  Company's  primary  debt  facility  on  terms  acceptable  to the  Company;
uncertainties  related  to  the  general  economy;   industry  factors  such  as
competition  and the costs of food and labor;  the  Company's  ability to obtain
adequate  capital on a timely  basis and to continue to lease or buy  successful
sites and construct new restaurants; and the Company's ability to locate capable
franchisees.  The price of the  Common  Stock can be  affected  by all the above
factors. Additionally, any shortfall in revenue or earnings from levels expected
by securities analysts could have an immediate and significant adverse effect on
the trading price of the Common Stock in a given period.

THE FAST FOOD RESTAURANT INDUSTRY

            The fast food restaurant  industry is highly  competitive and can be
                                    25

<PAGE>
significantly affected by many factors, including changers in local, regional or
national  economic  conditions,  changes in consumer tastes,  consumer  concerns
about the nutritional  quality of quick-service food and increases in the number
of, and particular locations of, competing quick- services restaurants.  Factors
such as inflation,  increases in food,  labor and energy costs, the availability
and cost of suitable sites,  fluctuating interest and insurance rates, state and
local regulations and licensing requirements and the availability of an adequate
number  of  hourly-paid  employees  can also  adversely  affect  the  fast  food
restaurant industry. In addition,  other fast food chains with greater financial
resources than the Company have similar or competing  operating concepts to that
of the Company.  Major chains,  which also have substantially  greater financial
resources and longer  operating  histories  than the Company,  dominate the fast
food restaurant  industry.  The Company competes  primarily on the basis of food
quality,  price and speed of service.  A significant  change in pricing or other
marketing  strategies by one or more of these  competitors could have an adverse
impact on the Company's sales, earnings and growth. In addition, with respect to
the  sale  of  franchises,   the  Company  competes  with  many  franchisors  of
restaurants and other business  concepts,  many of which have greater  financial
resources than the Company.

DECREASING RESTAURANT SALES

            Average  annual net sales per  Company-owned  Restaurant  open for a
full year have been declining each quarter  beginning with the second quarter of
1993,  being  approximately  $1,021,000 per  Restaurant for the 12-month  period
ended March 31, 1993, and $633,000 per Restaurant for the 12-month  period ended
September  9,  1996.   Management  believes  that  the  decrease  in  comparable
Restaurant  sales over this time period is primarily  attributable  to increased
sales pressure from competitor  discounting and, to a lesser extent,  the effect
of the Company's  cannibalization  of certain  markets.  All of the major chains
have  increasingly   offered  selected  food  items  and  combination  meals  at
discounted  prices.  Beginning  generally in the summer of 1993,  the major fast
food hamburger chains began to intensify their promotions of value priced meals,

many specifically  targeting the $.99 price point at which the Company sells its
"Champ Burger(R)." This increased  promotional activity has been sustained,  and
management  believes that it has had a negative  impact on the Company's  sales.
While the Company  cannot predict the duration of this  promotional  activity or
the  extent to which this  pricing  may become  more or less  competitive,  such
pricing  could  have a  continued  adverse  effect  on the  Company's  sales and
earnings.  Cannibalization  results from the addition of Restaurants in existing
markets in an attempt to gain market share,  reduce the  possibility of entry by
other double  drive-thru  concepts,  provide a sufficient  sales base to support
broadcast  media  advertising  and provide  for  customer  convenience.  Through
cannibalization,   the   Company  has  diluted  the  sales  of  certain  of  its
Restaurants.

SFAS 121
            The  Company  must  continually  examine  its assets  for  potential
impairment  where  circumstances  indicate that such  impairment  may exist,  in
accordance with Generally  Accepted  Accounting  Principles and the Statement of
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and Long-Lived  Assets to be Disposed Of" ("SFAS 121").  As a
retailer,  the Company  believes such  examination  requires the  operations and
store level  economics of  individual  restaurants  be evaluated  for  potential
impairment.  The Company recorded  significant  write-downs of its assets in the
fourth  quarter of fiscal  year 1995 and the third  quarter of fiscal  year 1996
pursuant to SFAS 121. No assurance  can be given that even an overall  return to
profitability  will  preclude  the  write-down  of  assets  associated  with the
operation of an individual restaurant or restaurants in the future.

SHARES ELIGIBLE FOR FUTURE SALE

            The Company is currently engaged in various transactions in which it
is  anticipated  that  approximately  5,000,000  shares of Common  Stock will be
issued by the Company as consideration  for various assets,  primarily the Rall-
Folks  Notes,  the Note and the NTDT Note (the  "Notes")  described  above under
"Liquidity  and  Capital  Resources."  The number of shares to be issued will be
determined   by   dividing   the   outstanding   balance  due  under  the  Notes
(approximately $4,600,000 as of September 9, 1996) by the average of the closing
sale price per share of the  Common  Stock for a set number of days prior to the
closing  date for each  transaction.  The shares  will either be  available  for
immediate  sale by the  persons and  entities  to whom they are  issued,  or the
Company will be required to immediately register them for sale under the federal
and state securities laws.

            Further,  in  connection  with  each of the  transactions  described
above, the Company agreed to certain price protection  provisions in the various
purchase  agreements  which guarantee that the persons and entities to whom such
Common  Stock is issued will receive from the sale of the Common Stock issued to
them at least a specified  percentage  (100% in the case of Rall-Folks and NTDT,
                                    26

<PAGE>

80% in the case of RDG) of the amount due to them at closing under their note or
notes. If they receive less, the Company is obligated to issue additional shares
of  Common  Stock to them  which  they may sell  until  such  time as they  have
received  the full amount  guaranteed  to be  received  by them.  The Company is
unable to predict the prices at which the Common  Stock will be sold and whether
it will be sold under  circumstances  which will  require  the  Company to issue
additional shares.

            In addition to the  foregoing,  the  Company has  previously  issued
shares of Common Stock in acquisition  transactions with various franchisees and
others and, in connection  therewith,  has granted  registration  rights to such
persons  for such  stock.  As a result of the  exercise  of such  rights by such
persons,  the Company currently has an obligation to register for resale by such
persons approximately 100,000 shares of Common Stock, with approximately 700,000
additional shares being subject to registration for resale upon demand.  None of
such shares are covered by any price protection provisions.

            As described above under "Liquidity and Capital Resources," in order
to promote an orderly  distribution of the Common Stock to be issued to and sold
by Rall-Folks, RDG and NTDT, the Company has imposed the following limits on the
sales that may be made by  Rall-Folks,  RDG and NTDT: (i) each may sell not more
than 50,000 shares of Common Stock per week (150,000 in the  aggregate) and (ii)
each may sell not more than 25,000  shares in any one day (75,000  shares in the
aggregate),  provided  that  each may sell  additional  shares in excess of such
limits if such additional shares are sold at a price higher than the lowest then
current bid price for the Common Stock ("on an uptick"). While it is anticipated
that the foregoing limits will allow an orderly distribution of the Common Stock
to be  issued  to and  sold by  Rall-  Folks,  RDG and  NTDT,  the  effect  of a
continuous  offering of an average of 30,000 shares per day by  Rall-Folks,  RDG
and NTDT is undeterminable at this time. There can be no assurance that the same
will not have an adverse effect on the market price for the Common Stock.

GOVERNMENT REGULATIONS

            The restaurant  business is subject to extensive federal,  state and
local government  regulations  relating to the development and operations of the
Restaurants,  including regulations relating to building,  parking,  ingress and
egress and zoning  requirements  and the  preparation  and sale of food and laws
that govern the Company's relationship with its employees,  such as minimum wage
requirements,  overtime and working conditions and citizenship requirements. The
failure  to obtain or retain  food  licenses  or  substantial  increases  in the
minimum wage could  adversely  affect the  operations  of the  Restaurants.  The
Company is also  subject  to federal  regulation  and  certain  state laws which
regulate the offer and sale of franchises to its franchisees.

            The  Company's  production,  use  and  sale  of  Modular  Restaurant
Packages  are subject to  compliance  with a number of federal,  state and local
laws and  requirements  affecting the  construction,  equipping and installation
thereof   (including   laws  that   require   pre-approval   of  all  plans  and
specifications,   licensing  and  periodic   independent   inspections   of  the
construction  process).  In  addition,  the  movement  and  use of  the  Modular
Restaurant Packages are subject to various federal,  state and local highway use
laws,  ordinances and regulations.  Such regulations may prescribe size and road
use  limitations  and impose lower than normal  speed  limits and various  other
requirements.

























                                       27


<PAGE>

PART II.  OTHER INFORMATION

Item 1.     Legal Proceedings

            Except  as  described  below,  the  Company  is not a  party  to any
material litigation and is not aware of any threatened material litigation:

            The Company, its directors,  certain of its officers and its outside
auditors  are  defendants  in a  proceeding  styled  IN RE  CHECKERS  SECURITIES
LITIGATION, Master File No. 93-1749-CIV-T-17A,  filed on October 13, 1993 in the
United States District Court for the Middle District of Florida, Tampa Division.
The complaint alleges,  generally,  that the Company issued materially false and
misleading  financial  statements  which were not  prepared in  accordance  with
generally  accepted  accounting  principles,  in violation of Sections 10(b) and
20(a) of the  Securities  Exchange  Act of 1934 and Rule 10b-5  thereunder,  and
Florida common law and statute.  The  allegations,  including an allegation that
the Company  inappropriately  selected the  percentage of  completion  method of
accounting for sales of modular Restaurant buildings,  are primarily directed to
certain accounting principles followed by a Checkers' division, Champion Modular
Restaurant  Company, a producer of modular Restaurant  building packages for use
by Checkers and its franchisees. The plaintiffs seek to represent a class of all
purchasers of the Company's  common stock between  November 22, 1991 and October
3,  1993,  and seek an  unspecified  amount of  damages.  Although  the  Company
believes  that this lawsuit is unfounded  and without  merit,  in order to avoid
further  expenses  of  litigation,  the parties  have  reached an  agreement  in
principal for the settlement of this class action.  The agreement for settlement
provides for a "claims made" settlement of $950,000, of which the first $375,000
will be paid by one of the Director and Officer Liability Insurance carriers and
an  unaffiliated  third  party defendant.  The first $100,000 and ninety percent
(90%) of the  remaining  claims  made  will be paid by one of the  Director  and
Officer Liability  Insurance carriers and the remaining ten percent (10%) of the
claims made will be paid by the Company, resulting in a maximum exposure for the
Company of $47,500. The settlement is subject to the execution of an appropriate
stipulation of settlement and other  documents as may be required or appropriate
to  obtain  approval  of the  settlement  by the  court,  notice to the class of
pendency of the action and proposed settlement,  and final court approval of the
settlement.

            The Company, one of its directors and a former  officer/director are
defendants  in  a  proceeding   styled  LOPEZ,  ET  AL.  V.  CHECKERS   DRIVE-IN
RESTAURANTS, INC., Case No. 94-282-CIV-T-17C,  filed on February 18, 1994 in the
United States District Court for the Middle District of Florida, Tampa Division.
The complaint  alleges,  generally,  that the defendants made certain materially
false and  misleading  public  statements  concerning  the pricing  practices of
competitors  and analysts'  projections  of the Company's  earnings for the year
ended  December  31,  1993,  in  violation  of  Sections  10(b) and 20(a) of the
Securities  Exchange Act of 1934 and Rule 10b-5 thereunder.  The plaintiffs seek
to represent a class of all  purchasers  of the  Company's  common stock between
August 26, 1993 and March 15, 1994, and seek an  unspecified  amount of damages.
Although the Company  believes this lawsuit is unfounded and without  merit,  in
order to avoid  further  expenses of  litigation,  the parties  have  reached an
agreement in principle for the  settlement  of this class action.  The agreement
for  settlement  provides  for various of the  Director  and  Officer  liability
insurance carriers to pay $8,175,000 cash and for the Company to issue warrants,
valued at approximately $3,000,000,  for the purchase of 5,100,000 shares of the
Company's  common  stock at a price of $1.375 per share.  The  warrants  will be
exercisable  for a  period  of  four  years  after  the  effective  date  of the
settlement. The parties filed a Stipulation and Agreement of Settlement with the
Court on August 23,  1996,  and a Notice of Pendency of Class  Action,  Proposed
Settlement  Thereof,  Settlement  Hearing and Right to Share in Settlement Funds
was mailed to class  members on  September  20, 1996 and a hearing to  determine
whether the proposed settlement is fair, reasonable and adequate will be held on
November 22, 1996.

            On August 10, 1995, a state court complaint was filed in the Circuit
Court of the Sixth Judicial Circuit in and for Pinellas County,  Florida,  Civil
Division,  entitled GAIL P.  GREENFELDER  AND POWERS  BURGERS,  INC. V. JAMES F.
WHITE, JR.,  CHECKERS DRIVE-IN  RESTAURANTS,  INC.,  HERBERT G. BROWN,  JAMES E.
MATTEI,  JARED  D.  BROWN,  ROBERT  G.  BROWN  AND  GEORGE  W.  COOK,  Case  No.
95-4644-CI-21.  The original complaint alleged, generally, that certain officers
of the  Company  intentionally  inflicted  severe  emotional  distress  upon Ms.
Greenfelder,  who is the sole  stockholder,  president  and  director  of Powers
Burgers, a Checkers franchisee.  The original complaint further alleged that Ms.
Greenfelder   and  Powers  Burgers  were  induced  into  entering  into  various
agreements   and   personal    guarantees    with   the   Company   based   upon
misrepresentations by the Company and its officers and that the Company violated
provisions of Florida's  Franchise Act and Florida's  Deceptive and Unfair Trade
Practices Act. The original complaint alleged that the Company is liable for all
damages caused to the plaintiffs.  The plaintiffs seek damages in an unspecified

                                       28

<PAGE>

amount in excess  of  $2,500,000  in  connection  with the claim of  intentional
infliction  of  emotional  distress,  $3,000,000  or the  return  of all  monies
invested  by the  plaintiffs  in  Checkers  franchises  in  connection  with the
misrepresentation  of claims,  punitive damages,  attorneys' fees and such other
relief as the court may deem appropriate. On November 27, 1995 the court granted
the Company's motion to dismiss the plaintiff's claims of intentional infliction
of emotional  distress.  The plaintiffs  subsequently filed an amended complaint
with  additional  allegations  that,  generally,  certain  officers  negligently
inflicted emotional distress upon Ms. Greenfelder and tortiously interfered with
various contracts and business  relationships,  and that the Company negligently
retained various officers in the Company's employ and breached various covenants
of good faith and fair dealing in connection with franchise  agreements  between
the parties.  On March 26, 1996 the court  dismissed  each of those claims.  The
Company  believes that this lawsuit is unfounded and without merit,  and intends
to defend it  vigorously.  No  estimate  of any  possible  loss or range of loss
resulting from the lawsuit can be made at this time.

            On August 10,  1995,  a state  court  counterclaim  and third  party
complaint was filed in the Circuit Court of the thirteenth  Judicial  Circuit in
and for Hillsborough County,  Florida, Civil Division,  entitled TAMPA CHECKMATE
FOOD  SERVICES,  INC.,  CHECKMATE  FOOD  SERVICES,  INC.  AND ROBERT H. GAGNE V.
CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI, JAMES F.
WHITE,  JR.,  JARED D.  BROWN,  ROBERT G.  BROWN AND  GEORGE W.  COOK,  Case No.
95-3869.  In the original action,  filed by the Company in July 1995 against Mr.
Gagne and Tampa Checkmate Food Services, Inc. a company controlled by Mr. Gagne,
the  Company  is seeking to collect  on a  promissory  note and  foreclose  on a
mortgage  securing the promissory  note issued by Tampa Checkmate and Mr. Gagne,
and obtain  declaratory  relief  regarding the rights of the respective  parties
under Tampa Checkmate's  franchise agreement with the Company.  The counterclaim
and third party complaint allege, generally, that Mr. Gagne, Tampa Checkmate and
Checkmate Food Services,  Inc. were induced into entering into various franchise
agreements   with  and   personal   guarantees   to  the   Company   based  upon
misrepresentations  by the Company.  The  counterclaim and third party complaint
seeks damages in the amount of  $3,000,000 or the return of all monies  invested
by  Checkmate,  Tampa  Checkmate  and  Gagne in  Checkers  franchises,  punitive
damages,   attorneys'  fees  and  such  other  relief  as  the  court  may  deem
appropriate.  The  counterclaim  was  dismissed by the court on January 26, 1996
with the right to amend.  On  February  12, 1996 the  counterclaimants  filed an
amended  counterclaim  alleging violations of Florida's Franchise Act, Florida's
Deceptive  and Unfair Trade  Practices  Act,  and breaches of implied  duties of
"good faith and fair  dealings" in  connection  with a settlement  agreement and
franchise  agreement  between various of the parties.  The amended  counterclaim
seeks a  judgement  for  damages in an  unspecified  amount,  punitive  damages,
attorneys'  fees and such other  relief as the court may deem  appropriate.  The
Company  intends to vigorously  prosecute its complaint in the original  action.
The  Company  believes  the  amended  counterclaim  by the  counterclaimants  is
unfounded and without merit, and intends to defend it vigorously. No estimate of
any  possible  loss or range of loss  resulting  from the lawsuit can be made at
this time.

Item 2.     Changes in Securities

            None

Item 3.     Defaults Upon Senior Securities

            The Company is not  currently  in  compliance  with the terms of its
            primary credit facility,  although a waiver thereof has been granted
            by  the  lenders  through   November  8,  1996.  See   "Management's
            Discussion  and  Analysis  of  Financial  Condition  and  Results of
            Operations."

Item 4.     Submission of Matters to a Vote of Security Holders

            None

Item 5.     Other Information

            None



                                       29


<PAGE>



Item 6.     Exhibits and Reports on Form 8-K

(a)         Exhibits:

            27    Financial Data Schedule


(b)         Reports on 8-K:

            The  following  reports  on Form 8-K were filed  during the  quarter
            covered by this report:

                  The  Company  filed a Report  on Form 8-K with the  Commission
                  dated June 26, 1996,  reporting  under Item 5, the resignation
                  of Keith J.  Kinsey as a Director  of the  Company,  effective
                  June 6, 1996.

                  The  Company  filed a Report  on Form 8-K with the  Commission
                  dated  July 19,  1996,  reporting  under Item 5 that a capital
                  management  firm was  negotiating  with  Checkers and its bank
                  syndicate to acquire the  outstanding  debt of Checkers  under
                  its credit facility and reporting under Item 5 the resignation
                  of Barry M.  Alpert as a Director  of the  Company,  effective
                  immediately.

                  The  Company  filed a Report  on Form 8-K with the  Commission
                  dated   August  16,   1996,   reporting   under  Item  5,  the
                  announcement  that a capital  management firm has successfully
                  consummated  the  acquisition  of the Company's debt under its
                  credit  facility  and that default  waivers had been  extended
                  through August 30, 1996.

                  The  Company  filed a Report  on Form 8-K with the  Commission
                  dated  August  30,  1996,  reporting  under  Item 5  that  the
                  negotiations  on  restructuring  the debt with the new lending
                  group  continue  and that the default  waivers  were  intended
                  through September 10, 1996.







     



















                                      30

<PAGE>




SIGNATURE
---------



                  Pursuant to the requirements of the Securities Exchange Act of
1934,  the  registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.




                                Checkers Drive-In Restaurants, Inc.
                                -----------------------------------
                                              (Registrant)







Date:         October 31, 1996







                                /s/ James T. Holder
                                ------------------------------------------------
                                James T. Holder
                                Chief Financial Officer and Principal Accounting
                                Officer



























                                       31


<PAGE>




                           SEPTEMBER 9, 1996 FORM 10-Q
                       CHECKERS DRIVE-IN RESTAURANTS, INC.
                                  EXHIBIT INDEX







     Exhibit #                       Exhibit Description
     ---------                       -------------------


           27                        Financial Data Schedule














































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